International Asset Pricing under Mild Segmentation: Theory and Test

This paper conducts a theoretical and empirical investigation of the pricing (and portfolio) implications of investment barriers in the context of international capital markets. The postulated market structure-labelled "mildly segmented"-leads to the existence of "super" risk premiums for a subset of securities and to a breakdown of the standard separation result. The empirical study uses an extended data base including LDC markets and provides tentative support for the mild segmentation hypothesis. THE QUESTION AS TO whether the international capital market is integrated or segmented appears particularly elusive. Indeed, the difficulties surrounding this important issue abound, as was made vividly clear by Solnik [20]. At the risk of tackling too ambitious a task, we undertake here to build a model and develop an empirical methodology to provide at least a partial answer to the

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