International Financial Integration and International Diversification Gains When Considering Financial Crises : Evidence from A Conditional CI-GCAPM

In this paper, we are interested in the study of the effect of financial crises/ period of turmoils on the international financial integration and on the expected gains of international diversification strategies. The sample consists of 4 developed markets in addition of the world market portfolio. The study period lasts between January 1988 and December 2015. This period is then divided in three sub periods (pre crises period, crises period and post crises period). To do that, we have developed and tested a conditional version of CI-GCAPM in order to study the effect, simultaneously, of fluctuations in exchange rates and the crises periods as imperfections, on the financial integration and on the gains associated with international diversification strategies. The results show that financial integration essentially goes through the effect of the world market portfolio. Currency risk is not priced. However, the international diversification gains are more important in the post crises periods