Financial integration in emerging markets: Evidence from factor models

The aim of this study is to examine the structure of financial integration by using a comprehensive dataset on the stock markets of 23 emerging market economies for the period 2005–2025.The main focus of the research is to analyse whether financial integration exhibits an asymmetric structure. To this end, traditional and quantile factor models are utilised. In addition, a set of observable macroeconomic and financial variables is constructed to assess the explanatory power of these variables for the unobserved factors. The results indicate that financial integration in emerging market economies exhibits a distinctly regime-dependent structure. While common factors have high explanatory power under normal market conditions, country-specific factors are observed to gain strength during periods of positive and negative excess returns. These results reveal that financial integration is not a stochastic process, but rather a dynamic process dependent on market sensitivity. Furthermore, it is seen that the factor structure determining the level of financial integration is largely driven by global financial conditions (VIX, exchange rates, commodity prices) from a macro-financial perspective.