Effects of financial turmoil on financial integration and risk premia in emerging markets

•We estimate a variant of the International Asset Pricing Model.•This model allows for time-varying integration and includes the foreign currency risk.•We use monthly data for 12 emerging countries over the period 1988 M3–2015M3.•Financial integration has registered reversals episodes during regional crises.•has decreased in most countries of our sample since the global crisis.

The aim of this article is to analyze how financial crises affect the dynamics of international financial integration and of the risk premia in emerging markets. Accordingly, we estimate a variant of the International Asset Pricing Model developed by Carrieri et al. (2007), allowing for time-varying stock market integration, in which we include the foreign currency risk. Our sample consists of monthly data for 12 emerging stock markets over the period 1988M3–2015M3. We find that while the financial integration of emerging stock markets has registered short-term reversals episodes in countries that have been exposed to national or/and regional financial crises, it has decreased in most of the emerging countries of our sample since the global crisis. Moreover, the upward trend in financial integration has not reduced the local market risk premium component as much as could be expected. However, the recent global crisis has induced a reassessment of the world market risk premium for all emerging countries, highlighting the global nature of the crisis.