Does Local Risk Still Matter in the Highly Liberalised Emerging Market of Malaysia?

Abstract

Since 2009, both foreign and local investors in the Malaysian equity market have faced a single set of rules, enjoyed equal access to the same set of financial instruments, and benefited from international levels of minority investor protection, thus fulfilling the conditions for full integration with the world market. Malaysia can be identified as a highly liberalised Asian emerging equity market that aligns with the definition of an “integrated market” in existing empirical studies. Using a sample dataset from 2009 to 2016, we test whether Malaysia, as a highly liberalised emerging equity market, is still subject to local market risk pricing, along with six other Asian emerging markets, including China, India, Indonesia, the Philippines, South Korea and Thailand. The results from our study show that both world and local market risk are still priced in Malaysia and other Asian emerging markets, leading to the conclusion that none of them are fully integrated into the world market.  This suggests that there may be other implicit barriers affecting equity market integration in emerging markets.