Time varying equity market beta as an index of financial openness?

Abstract

From the data consisting of over a century, there has been a significant relationship between capital account liberalization and increasing correlation among national stock markets of different countries (Quinn and Voth, 2008). In this research we propose a price based de facto measure of financial integration/openness that can be used to rank selected Asian economies solely on the basis of standardized co-movements of their equity markets in relation to the representative world markets. We call this new measure as time varying equity market beta (TVEMB). Significant degree of correlation with some major and complex indices and the ability to show dynamic de facto situations of financial openness, supported by several evidences, allow us to use TVEMB as an alternative measure in conjunction with other indicators of financial openness/integration.

Keywords:

• financial openness
• financial integration
• stock market integration
• Asian economies

JEL Classification:

• E44
• F15
• F36
• F41
• G15

Notes

1 ¹KAOPEN Index of Financial Openness by Chinn and Ito.

2 ²Top three representations in EUX are: FTSE 100(24.12%), XETRA DAX PF (12.64%) Nikkei 225 (12.42%). For complete weighting and constituent indices, see Appendix Table 1.