What Segments Equity Markets?

We propose a new, valuation-based measure of world equity market segmentation. While we observe decreased levels of segmentation in many countries, the level of segmentation remains significant in emerging markets. We characterize the factors that account for variation in market segmentation both through time as well as across countries. Both a country's regulation with respect to foreign capital flows and certain nonregulatory factors are important. In particular, we identify a country's political risk profile and its stock market development as two additional local segmentation factors as well as the U.S. corporate credit spread as a global segmentation factor. The Author 2011. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oup.com., Oxford University Press.

[1]  Jonathan N. Katz,et al.  What To Do (and Not to Do) with Time-Series Cross-Section Data , 1995, American Political Science Review.

[2]  Xiaoyan Zhang.  Specification Test of International Asset Pricing Models , 2001 .

[3]  Francis E. Warnock,et al.  International Capital Flows and U.S. Interest Rates , 2005 .

[4]  Punam Chuhan.  Are institutional investors an important source of portfolio investment in emerging markets , 1994 .

[5]  C. Leuz,et al.  The Rodney L. White Center for Financial Research International Differences in the Cost of Equity Capital: Do Legal Institutions and Securities Regulation Matter? , 2022 .

[6]  Donald B. Keim,et al.  Predicting returns in the stock and bond markets , 1986 .

[7]  Campbell R. Harvey.  The World Price of Covariance Risk , 1991 .

[8]  M. Obstfeld.  Risk-Taking, Global Diversification, and Growth , 1992 .

[9]  Andrei Shleifer,et al.  Investor Protection and Equity Markets , 2000 .

[10]  Linda L. Tesar,et al.  U.S. Equity Investment in Foreign Markets: Portfolio Rebalancing or Return Chasing? , 1996 .

[11]  G. Doppelhofer,et al.  Determinants of Economic Growth , 2007 .

[12]  Geert Bekaert,et al.  International Stock Return Comovements , 2005 .

[13]  J. Sachs,et al.  Economic Reform and the Process of Global Integration , 1995 .

[14]  Jennifer L. Castle.  Automatic Econometric Model Selection using PcGets. , 2006 .

[15]  Raymond J. Fisman,et al.  Financial Development and Intersectoral Allocation: A New Approach , 2004 .

[16]  Francis E. Warnock,et al.  A Simple Measure of the Intensity of Capital Controls , 2001, SSRN Electronic Journal.

[17]  David F. Hendry,et al.  General-to-Specific Modeling: An Overview and Selected Bibliography , 2005 .

[18]  Wei Xiong,et al.  Speculative Trading and Stock Prices: Evidence from Chinese A-B Share Premia , 2005 .

[19]  Cheol S. Eun,et al.  Mean-Variance Convergence Around the World , 2008 .

[20]  J. Aizenman,et al.  Endogenous Financial and Trade Openness , 2004 .

[21]  Luigi Zingales,et al.  Financial Dependence and Growth , 1996 .

[22]  Lieven Baele,et al.  Time-Varying Integration and International Diversification Strategies , 2007 .

[23]  Neng Wang,et al.  Agency Conflicts, Investment, and Asset Pricing , 2005 .

[24]  René M. Stulz,et al.  On the Effects of Barriers to International Investment , 1981 .

[25]  J. Aizenman,et al.  Endogenous Financial and Trade Openness: Efficiency and Political Economy Considerations , 2004 .

[26]  R. Kalra,et al.  Earnings Management and Investor Protection: An International Comparison , 2004 .

[27]  Malcolm P. Baker,et al.  Global, Local, and Contagious Investor Sentiment , 2009 .

[28]  Tim Bollersleva,et al.  Volatility puzzles : a simple framework for gauging return-volatility regressions , 2006 .

[29]  I. Dinç,et al.  Politicians and Banks: Political Influences on Government-Owned Banks in Emerging Markets , 2005 .

[30]  F. SharpeWilliam.  Investor Wealth Measures and Expected Return , 1990 .

[31]  F. Black.  The Magic in Earnings: Economic Earnings versus Accounting Earnings , 1980 .

[32]  Virginie Coudert,et al.  Does risk aversion drive financial crises? Testing the predictive power of empirical indicators , 2008 .

[33]  D. Quinn.  The Correlates of Change in International Financial Regulation , 1997, American Political Science Review.

[34]  Francesca Carrieri,et al.  The Dynamics of Geographic Versus Sectoral Diversification: Is There a Link to the Real Economy? , 2005 .

[35]  A. Shleifer,et al.  Legal Determinants of External Finance , 1997 .

[36]  W. Newey,et al.  A Simple, Positive Semi-Definite, Heteroskedasticity and Autocorrelationconsistent Covariance Matrix , 1986 .

[37]  Campbell R. Harvey,et al.  The Dynamics of Emerging Market Equity Flows , 1999 .

[38]  Charles Trzcinka,et al.  A New Estimate of Transaction Costs , 1999 .

[39]  Kenneth S. Rogoff,et al.  Effects of Financial Globalization on Developing Countries: Some Empirical Evidence , 2003 .

[40]  David A. Lesmond.  Liquidity of emerging markets , 2005 .

[41]  William H. Sackley.  Why Are Foreign Firms Listed in the U.S. Worth More , 2004 .

[42]  Francesca Carrieri,et al.  Characterizing World Market Integration Through Time , 2003 .

[43]  Eli M. Remolona,et al.  The Dynamic Pricing of Sovereign Risk in Emerging Markets: Fundamentals and Risk Aversion , 2008 .

[44]  Hans-Martin Krolzig,et al.  We Ran One Regression , 2004 .

[45]  Mark Lang,et al.  THE EFFECTS OF ACCOUNTING DIVERSITY - EVIDENCE FROM THE EUROPEAN-UNION , 1994 .

[46]  Campbell R. Harvey,et al.  Time-Varying World Market Integration , 1994 .

[47]  Lieven Baele.  Volatility Spillover Effects in European Equity Markets , 2004, Journal of Financial and Quantitative Analysis.

[48]  J. Frankel.  Measuring International Capital Mobility: A Review , 1992 .

[49]  Ingrid M. Werner,et al.  Home Bias and the High Turnover , 1992 .

[50]  Itay Goldstein,et al.  Takeover Activity and Target Valuations: Feedback Loops in Financial Markets , 2009 .

[51]  V. Errunza,et al.  International Asset Pricing under Mild Segmentation: Theory and Test , 1985 .

[52]  Peter D. Wysocki,et al.  Investor Protection and Earnings Management: An International Comparison , 2002 .

[53]  Jeffrey Wurgler,et al.  Financial Markets and the Allocation of Capital , 1999 .

[54]  Richard Roll,et al.  Global market integration: An alternative measure and its application , 2009 .

[55]  Geert Bekaert,et al.  Market Integration and Investment Barriers in Emerging Equity Markets , 1995 .

[56]  Laura Alfaro,et al.  Why Doesn't Capital Flow from Rich to Poor Countries? An Empirical Investigation , 2008, The Review of Economics and Statistics.

[57]  Michael L. Lemmon,et al.  Back to the Beginning: Persistence and the Cross-Section of Corporate Capital Structure , 2006 .

[58]  Philip E. Strahan,et al.  The Finance-Growth Nexus: Evidence from Bank Branch Deregulation , 1996 .

[59]  S. B. Thompson.  Simple Formulas for Standard Errors that Cluster by Both Firm and Time , 2009 .

[60]  Florencio López‐de‐Silanes,et al.  Investor Protection and Corporate Governance , 1999 .

[61]  Campbell R. Harvey,et al.  Emerging Equity Markets and Economic Development , 2000 .

[62]  Campbell R. Harvey,et al.  Foreign Speculators and Emerging Equity Markets , 1997 .

[63]  H. White.  A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity , 1980 .

[64]  P. Lane,et al.  The External Wealth of Nations Measures of Foreign Assets and Liabilities for Industrial and Developing Countries , 1999, SSRN Electronic Journal.

[65]  J. Campbell,et al.  By Force of Habit: A Consumption‐Based Explanation of Aggregate Stock Market Behavior , 1995, Journal of Political Economy.

[66]  P. Henry.  Stock Market Liberalization, Economic Reform, and Emerging Market Equity Prices , 2000 .

[67]  H. Broadman,et al.  Finance and Growth: Schumpeter Might Be Right , 1993 .

[68]  Marcin T. Kacperczyk,et al.  Labor Unions, Operating Leverage, and Expected Stock Returns , 2006 .

[69]  G. Bekaert,et al.  Inflation and the Stock Market: Understanding the 'Fed Model' , 2008 .

[70]  Utpal Bhattacharya,et al.  The World Price of Insider Trading , 2002 .

[71]  K. Hoover,et al.  Truth and Robustness in Cross-Country Growth Regressions , 2000 .

[72]  D. Ng,et al.  Country, Industry and Idiosyncratic Components in Valuation Ratios , 2010 .

[73]  Eduardo Fernández-Arias.  The new wave of private capital inflows: Push or pull? , 1996 .

[74]  Jonathan Eaton,et al.  Technology, Geography, and Trade , 2002 .

[75]  George P. Nishiotis.  Do Indirect Investment Barriers Contribute to Capital Market Segmentation , 2004 .

[76]  Cheol S. Eun,et al.  Corporate valuation around the world: The effects of governance, growth, and openness , 2007 .

[77]  Kevin D. Hoover,et al.  Data mining reconsidered: encompassing and the general-to-specific approach to specification search , 1997 .

[78]  Boyan Jovanovic,et al.  Stock markets and development , 1993 .

[79]  Jordan I. Siegel,et al.  Can foreign firms bond themselves effectively by . . renting U.S. securities laws , 2005 .

[80]  Anthony J. Venables,et al.  Shifts in Economic Geography and their Causes , 2006 .