Capital Controls and International Capital Market Segmentation: The Evidence from the Japanese and American Stock Markets





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    • M. N. Gultekin is from Graduate School of Business Administration, University of North Carolina at Chapel Hill; N. B. Gultekin is from Wharton School, University of Pennsylvania and is Chief Advisor to the Prime Minister of the Republic of Turkey; Penati is Director of Research, Akros, S.P.A. This work was completed while N. B. Gultekin was at the Central Bank of the Republic of Turkey and Penati was at the Wharton School, University of Pennsylvania. The views expressed here are solely those of the authors and do not necessarily represent the views of the Prime Ministry, the Central Bank, or Akros, S.P.A. We thank Bernard Dumas, Bob Litzenberger, Craig MacKinlay, Jennifer Conrad, Bob Harris, Naoki Kishimoto, the editor René Stulz, and an anonymous referee of the Journal for many useful suggestions, and David Ellis and Lisa Zingaro for valuable research assistance. We are grateful to the University of Pennsylvania Research Fund for its generous financial support and especially to Nomura Research Institute for providing us with the Japanese stock returns. M. N. Gultekin acknowledges a research grant from the Graduate School of Business Administration, the University of North Carolina at Chapel Hill.


The paper focuses on two countries, Japan and the U.S., to test the integration of capital markets. In Japan, the enactment of the Foreign Exchange and Foreign Trade Control Law in December of 1980 amounted to a true regime switch that virtually eliminated capital controls. Using multifactor asset pricing models, we show that the price of risk in the U.S. and Japanese stock markets was different before, but not after, the liberalization. This evidence supports the view that governments are the source of international capital market segmentation.