International Asset Pricing under Mild Segmentation: Theory and Test

Authors

  • VIHANG ERRUNZA,

  • ETIENNE LOSQ

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    • Errunza is from McGill University and Losq is from McGill University and ESSEC, France. The authors wish to thank the International Finance Corporation, Washington, D.C. for funding the development of the LDC securities data bank. Research assistance of Prasad Padmanabhan and insightful comments of James Bicksler, Bernard Dumas, Dennis Logue, Lemma Senbet, René Stulz, Alex Whitmore, and Morty Yalovsky are greatly acknowledged. Financial support was provided by SSHRC and Faculty of Management, McGill University.


ABSTRACT

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.

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