International financial Market?s Integration and Modelling Returns of Risky Assets

The aim of this paper is to test the ability of conditional and unconditionalCAPM models to explain emerging markets returns in terms of theirintegration into the international market. We use data on 5 developedcountries and 5 emerging countries as well as data on the Tunis StockExchange (TSE) after the reforms. The results show that the correlationsbetween emerging markets returns and developed markets returns are verylow and sometimes negative. Conditional APT (as well as conditionalCAPM) has lower predictive power for emerging markets than for developedmarkets. Finally, following the financial reforms, Tunisian financial marketsbecame more and more integrated to the international market (excess returnsand unconditional beta consistent with predictions). However, conditionalAPT does not accurately explain Tunisian market returns. This studyconfirms the unavailability of an accurate modelling technique of the TunisStock Exchange structure