Capital Flow Controls, International Asset Pricing, and Investors' Welfare: A Multi-Country Framework



    Faculty of ManagementSearch for more papers by this author

    ProfessorSearch for more papers by this author
    • Faculty of Management, McGill University and ESSEC, Paris, respectively. Professor Losq passed away prior to publication of this paper. This work is dedicated to the fond memories of Etienne Losq, who enlightened me and all others he touched with his brilliant understanding of financial economics and his wisdom about life in general. The authors wish to thank Bernard Dumas, Don Lessard, Arthur Moreau, Lemma Senbet, Bruno Solnik, René Stulz, Marty Subrahmanyam, and anonymous referees of this Journal for valuable suggestions. Financial support of SSHRC is gratefully acknowledged.


This paper investigates the impact of capital flow restrictions on the pricing of securities, on the optimal portfolio composition for investors of different nationalities, and on their welfare. Under capital flow controls, the equilibrium price of a security is determined jointly by its international and national risk premiums, and investors acquire nationality-specific portfolios along with a market-wide proxy for the world market portfolio. Removal of investment barriers generally leads to an increase in the aggregate market value of the affected securities, and all investors favor a move toward market integration. Introduction of different types of index funds in the world market generally increases world market integration and investor welfare.