Time-varying equity market integration in South East Asia and tests of the ICAPM

I test the conditional international CAPM using 1990–2003 data for nine South-East Asian markets. Previous research has concluded that conditional ICAPM fails to explain expected returns in emerging markets. I argue that this is due to variations in the degree of integration among industry or size components of local equity portfolios. To test this hypothesis, I construct country, industry and market capitalisation portfolios and test the conditional ICAPM separately for each portfolio. The ICAPM is rejected more often for industries which produce mainly locally-traded outputs and for smaller market capitalisation portfolios. [Continues.]