Emerging Equity Markets and its Integration
Yasuaki Watanabe*
Key Words : Emerging Equity Market, Market Integration, Principal Components
Analysis
JEL Classification : C10, F15* Affiliation : Kochi University of Technology, Professor of Finance at Research Center forSocial Management System
Mailing Address : 185 Miyanokuchi, Tosayamada-cho, Kami City, Kochi Prefecture782-8502, Japan
Email Address : watanabe.yasuaki@kochi-tech.ac.jp
Home Phone No. :+81-887-57-2776 Fax Number : +81-887-57-2811
要約：エマージング市場の市場統合度は時の経過とともに強まる傾向がある。このことは、エマージン
グ市場と先進国市場の経済と貿易の絆もまた強くなっていることを示唆する。ここでは、BRIC’sと VISTA という範疇でエマージング市場を捉える。そして、国内総生産、貿易収支、および外貨準備高の３つの指標で国の豊かさと先進国との緊密性を把握する。その結果、中国とトルコがそれぞれの範疇で最も高い主成分分析における得点を示した。
Abstract: The market integration in emerging markets are becoming stronger with the passage of time. Thisimplies that economic and trade ties between emerging markets and developed markets are also
becoming stronger. Here, we take two categories such as BRIC’s and VISTA. We take three factors
such as GDP, Trade Balance, and Foreign Exchange Reserves to see which country is wealthier thanothers, in other words, which country is much closer to developed country in terms of market
integration. As a result, we can confirm that China and Turkey mark the highest principal components
points.

1. Introduction
The term of emerging market was not so familiar to until 1980’s. Emerging market usuallyindicate the countries and areas of initial developing stages such as Latin America, East Asia,South Asia, East Europe, Middle East, and Africa. Here, we check the level of market
integration of emerging equity markets in time series analysis. Market integration can be
represented by correlated coefficients. According to Divecha, Drach, and Stefek (1992), thecorrelated coefficients among emerging equity markets were 0.07 from January 1986 to March
1991 in U.S. dollar base. It seems that this figure will increase with passage of time due tostronger market integration. In addition, we check the main factors that contribute to the market
integration by using the methodology of principal components analysis. The purpose of thisshort paper is to diffuse the features of emerging equity markets for practitioner audiences.
2. ModelWe can define correlated coefficient as ρ xy =COV ( x, y )σ xσ y………………………………..(1)where COV ( x, y ) means covariance between x and y, and σ x and σ y mean the standard
deviation in both x and y. In addition, principal components analysis is indicated by Max : σ z2……………………….(2) where Z = ω1 X 1 + ϖ 2 X 2 + ..... + ϖ k X k . Namely, we must find out
each ω1 , ω2 ,.....ωk which maximize σ z2 . The following analyses are based on these simple
formula (1) and (2).
3. Analytical Results
At first, we examine the countries such as Brazil, Russia, India, and China. These countries areoften called as “BRIC’s” for reference. The following Table1. shows the transitions of correlated
coefficients among BRIC’s with every five years intervals.
Table 1. Correlated Coefficients of BRIC's (US$ base)
1995-1999
BrazilRussiaIndia
China
Brazil1
Russia0.5651
1India
0.22920.3192
1
China
0.35840.29450.2031
1
2000-2004
BrazilRussiaIndia
China

Brazil10.36670.44860.4542

2005-2007
BrazilRussiaIndia
China

Brazil10.73790.64960.7035Russia

India

Average

0.3282Average

0.3277China

10.10760.3153

10.2740

1

RussiaIndia

China1
Average 0.6183
0.464510.5338
0.62041(source : MSCI Global Investable Market Indices)Judging from the above Table 1., we can see that the figures of average are increasing with theelapse of time. We may prove the stronger market integration among BRIC’s. Especially, theincreases of each correlated coefficients during the period from 2005 to 2007 are noteworthy.
Next, we examine the countries such as Indonesia, South Africa, Turkey, and Argentina. Thesecountries are often called as “VISTA” for reference. Unfortunately, as we can’t receive the dataof Vietnam before November 2007, we omit the analysis of Vietnam in this case. The following
Table2. shows the transitions of correlated coefficients among VISTA with every five years
intervals. We can also see the same trend in these countries.

Table 2.. Correlated Coefficients of VISTA (US$ base)
1993-1997
Indonesia South Africa Turkey Argentina
Indonesia
1South Africa 0.231015189
1AverageTurkey0.229122878 0.12499183
1Argentina
0.29990.27010.1663
1
1998-2002
Indonesia South Africa Turkey Argentina
Indonesia
1South Africa 0.382646311
1
Average
Turkey0.108463698 0.32912014
1
Argentina0.22030.31640.313510.22020.2784

2003-2007
Indonesia South Africa Turkey Argentina
Indonesia
1South Africa 0.360086263
1
Average 0.4712
Turkey0.45624968 0.47553962
1
Argentina
0.42770.5761
0.53151(source : MSCI Global Investable Market Indices)

In addition, if we look at the trend between emerging equity markets and G7 (U.S.A., Canada,U.K., France, Germany, Italy, and Japan) in Table 3., we can confirm that this tendency will also
hold true between emerging markets and developed countries.
Table 3. Correlated Coefficients of EM and G7 (US$ base)
1988-1992
EMG7
EM
1
G7
0.44501.00001993-1997
EMG7EM
10.5016

G71.0000
Average

1998-2002
EM
G72003-2007
EMG7EM
10.7568

0.4712G7
1.0000EM
G7
10.7804
1.0000(source : MSCI Global Investable Market Indices)

While, we take three factors such as GDP, Trade Balance, and Foreign Exchange Reserves tosee which country is wealthier than others, in other words, which country is much closer todeveloped country in terms of market integration. We can confirm that China marks the highest
principal components points from Table 4.. This implies that China has strong ties in economics
and trades in both emerging markets and developed markets from Table 1. and Table 3.
Furthermore, We can safely say that Turkey will hold true to China’s case from Table 5.

Table 4.
BrazilRussiaIndia
China
Table 5.
VietnamIndonesia
South Africa
TurkeyArgentina

BRIC's Analytical Results (Unit : 0,000 US$)GDP
Trade Balance Foreign Exchange Reserves
79,940,000
76,600,000
80,080,000
262,630,000

19,185,900
33,980,600
24,514,100
176,111,800

5,357,400
29,556,760
17,725,100
104,092,700

Principal Components Points
5,706,362-14,349,756-1,916,544
10,559,937(source:weis The World 2007-2008)
VISTA's Analytical Results (Unit : 0,000 US$)GDP
Trade Balance Foreign Exchange Reserves Principal Components Points
5,320,000
28,130,000
23,880,000
36,260,000
18,330,000

6,911,400
14,336,100
12,068,000
190,250
6,870,5001,190,430
3,991,600
2,374,000
6,090,000
2,717,900-16,627,765
6,283,571
2,063,177
12,331,672-4,050,656(source:weis The World 2007-2008)

4. Conclusion
We take two popular categories in emerging markets represented by BRIC’s and VISTA.
The market integration in both emerging and developed markets is becoming stronger year byyear. This can be easily proved by checking the figures of correlated coefficients.
Thus, we take three factors such as GDP, Trade Balance, and Foreign Exchange Reserves asagents’ variables of wealth and market integration. Namely, wealth and market integration ispositively correlated. So, we believe that the wealthier country becomes, the stronger market
integration becomes.
Reference(1) Divecha,Arjun B.,Jaime Drach, and Dan Stefek, Emerging Markets : A Quantitative
Perspective, The Journal Portfolio Management, Fall 1992.
(2) Ueda Shoichi, Principal Components Analysis, Asakura Shoten, 2003.
(3) Watanabe Yasuaki, Fundamental Analysis of Emerging Equity Markets, Printec, 2003
(4) Watanabe Yasuaki, et al., Economics of Emerging Markets, Nova Science Publishers, 2008