An International CAPM for Partially Integrated Markets : Theory and Empirical Evidence

This article proposes a theoretical testable ICAPM for partially segmented markets. We establish that if some investors do not hold all international assets because of implicit and/or explicit segmentation factors, the world market portfolio is not efficient and the classic ICAPM must be augmented by a new factor reflecting the local risk undiversifiable internationally. We test this model empirically using a multivariate GARCH-in-mean methodology and non-linear models for Asian and Latin American emerging markets. Our findings show that the degree of stock market segmentation is time-varying and that the premium associated with the domestic risk is the most important component of the total risk premium. However, our results also show that most of the emerging markets we study have become more integrated as a result of liberalization and reforms and that the relative magnitude of the premium associated with global factors has increased in recent years