Investment, financial sector development and the degree of emerging markets integration

Abstract

Purpose The purpose of this paper is to explore the co-movements among emerging markets. The authors, additionally, investigate the driven force of the within emerging markets integration. The authors provide evidence of volatility clustering, leverage effect and time-varying integration of emerging markets. Design/methodology/approach The study used dynamic conditional correlation techniques to estimate the time-varying conditional correlations among emerging markets. The cross-sectional and time series variations in the within emerging markets correlations are then described by various market and economic factors. Findings The authors show that investment, domestic credit to the private sector and import of financial services have a positive relation within emerging markets co-movements. However, claim on central government, current account balance and financial services exports have a negative relation with the integration among emerging markets. Evidence is also provided that liquidity and market depth explain the correlation between emerging markets. Originality/value The findings show that emerging markets ability to convert domestic assets into investments appears to be the single most important factor influencing with in emerging markets integration. The findings indicate that across-emerging markets diversification potential exists.