Time-varying market integration and expected returns in emerging markets

In the last two decades, emerging stock markets have become less segmented from world stock markets. The average annual decrease in segmentation of 0.055, on a [ 0 , 1 ] scale, reduces the cost of capital (measured by dividend yields) by about 11 basis points, and reduces stock returns by about 4.5%. The decline in expected returns is due to a decrease in two types of segmentation. A fall in local segmentation accounts for about 2/3 of the decline in expected returns. The remaining 1/3 is due to a fall in the level of segmentation of the region. These results, which we document for 30 emerging markets, are robust to the addition of control variables.