The Cost of Stock Market Integration in Emerging Markets

We find that stock markets more integrated towards global markets experienced larger price drops during the 2008 financial crisis. The negative relation between the crisis period return and the degree of stock market integration is evident only in emerging countries. We show that the withdrawal of foreign equity investments during the crisis period does not contribute to the negative relation between the crisis period stock return and the degree of stock market integration. Instead, the negative relation arises because integrated emerging markets experience increased exposure to the negative global shock during a financial crisis. We obtain similar results when the 1997 Asian financial crisis is used as an experimental setting.