| Summary: | 碩士 === 國立成功大學 === 會計學系碩博士班 === 98 === Modern portfolio theory suggests that the international diversification of portfolio of emerging market and developed market has a positive effect on its performance. When assets are traded and priced in foreign markets, the integration or segregation of the capital markets must be taken into consideration. In the current thesis, I study the potential integration of South Africa and U.S markets with the world market. The emerging markets of South Africa have enjoyed remarkably rapid economic growth in the past decades and are gaining increased influence in the world capital markets. Therefore, the integration of these markets with developed markets deserves closer attention.
This thesis investigate whether global and local market risks as well as the currency risk are priced in the South African stock market using conditional international asset pricing models. The observation consists of monthly data from February 2002 to March 2010. This study takes the view of US investors and measures all returns of the US and South Africa indices in US dollars. The estimation is conducted using a modified version of the multivariate GARCH-M framework with constant prices of risk specification. The approach allows for conditional variance and covariance processes between analyzed markets.
The results show that the unconditional price of world risk is positive and significant with reasonable values, which is in line with the theory and earlier studies. However, local risks are not priced both in the South African as well as the US market. Finally, the currency risk is priced in the South African stock market. In other words, US investors seem not to put a lot of concern about what happens in the local market except for the currency risk when investing in South Africa. When portfolio managers aim to optimize the return–risk relationship, the results indicate that at least in the case of South Africa, one should account for the currency risk when calculating the key inputs for the optimization.
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