Global Market Integration Reversals and Funding Liquidity
(with Francesca Carrieri and Aytek Malkhozov)
Abstract:  We examine the role of leverage-constrained investors in international financial integration. To this effect, we construct a segmentation indicator based on betting-against-beta portfolios across countries that measure the difficulty to leverage cross-border positions and show that it is associated with funding capital. We find that temporary reversals in financial integration are a salient feature of international stock markets. Such reversals can occur in the absence of apparent increases in the traditional foreign investment barriers previously studied. We show that the probability of reversals is associated with larger funding constraints. All our findings are consistent with tighter limits to arbitrage and increased home bias during funding distress periods. Our empirical analysis is guided by a margin-based CAPM extended to an international setting.
Accepted for presentation in: Annual Financial Market Liquidity Conference, Budapest, Hungary2017; Financial Management Association International (FMA), Boston, USA 2017; Northen Finance Association (NFA), Halifax, Canada 2017; International Workshop on Financial System Architecture & Stability (IWFSAS), Montreal, Canada 2017; International Finance and Banking Society (IFABS), Oxford, UK 2017;

Abstract: We test a fully conditional, international, intertemporal asset-pricing model. With a large cross-section of developed and emerging markets, we find support for a constant price of currency risk but not for intertemporal risk. Intertemporal risk is priced only conditionally, when time-variation is introduced. This requires disentangling the two, as both factors are likely proxies of the state variables that affect asset prices over time. The fit of the model is mainly improved by currency risk rather than intertemporal risk. However, a model with residual time-varying intertemporal risk in addition to the other factors statistically outperforms the one with currency risk.

Accepted for presentation in: 
Financial Management Association International (FMA), Florida, USA 2015; European Finance Association (EFA), Vienna, Austria 2015; International Conference of the French Finance Association (AFFI), Cergy, France 2015European Financial Management Association (EFMA),  Breukelen, Netherlands 2015; Midwest Finance Association (MFA), Chicago, USA 2015 
available on SSRN (listed on SSRN's Top Ten download list for: Emerging Markets: Finance eJournal). Previously circulated as "Pricing Together Developed and Emerging Markets with Multiple Risk Factors".

Prices of Risk and the Business Cycle, (with Francesca Carrieri)
Abstract: We estimate in a linear regression framework an asset pricing model that is both intertemporal and fully conditional. Using time-varying quantities of risk as regressors, we focus our analysis on the time-varying prices of risk to capture investors’ assessment of the shift in investment opportunities through the economic cycle. Separately with each information variable, we show that the reward for intertemporal risk is decreasing during recessions with the proxy that negatively predicts market returns. This evidence stands opposite to our findings for the compensation for market risk. When combining all information variables we find that in statistical terms the conditional price for intertemporal risk with this proxy is relatively more significant than the price of market risk at the end of an expansion and during recessions. Thus differences in the two sources of risk are heightened in this phase of the cycle since holding assets with weak or negative correlation with the market becomes crucial especially at these times. The relative importance of intertemporal risk in recessions is also supported by the reduction in the unexplained portion of the asset pricing model for those periods.

Accepted for presentation in: Econometric Society World Congress, Montreal, Canada 2015; European Financial Management Association (EFMA),  Breukelen, Netherlands 2015

Integrated Markets: Economic or Financial Integration?, (with Lilian Ng and Bruno Solnik)
We study the evolution of global economic and financial market integration in a theoretically-motivated framework. Using firm-level cash flow forecasts, we find that while the two forms of integration have been progressing rapidly over the years, they have reversed following the global financial crisis. In the post-crisis period, emerging markets are still lagging behind developed countries in financial integration, but their level of economic integration has converged to that of developed countries. This is suggestive evidence that the driver of integration for emerging markets is economic rather than financial. While country development, as measured by GDP per capita and communications technology, as well as the world business cycle are the leading common determinants of both forms of integration, a country's banking sector and investment profile drive, respectively, the progress of economic integration and the speed of financial integration.