Asset Pricing in Partially Segmented Markets: Evidence from the Finnish Market



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    • Insead, Fontainebleau, France. This paper is based on the first chapter of my dissertation submitted at the Graduate School of Business, Stanford University. I want to express my sincerest thanks to my dissertation committee, Michael Gibbons, Bruce Grundy, and Allan Kleidon, for their invaluable comments throughout this dissertation research. I also want to thank Bengt Holmström, Bob Litzenberger, Paul Pfleiderer, Kristian Rydqvist, Myron Scholes, and Eric Terry for their help.


This paper analyzes asset pricing in a partially segmented market where citizens of a small country are allowed to hold only their domestic securities, whereas the rest of the investors (“foreigners”) are essentially allowed to hold all securities. In this market setting it may occur that the citizens of the small country are willing to pay less for their domestic securities than are the foreign investors. The paper derives equilibrium required rates of return for different investors in this market setting which perfectly occurred in Finland and tests this equilibrium model using data from the Finnish stock market. Empirical results are consistent with the hypotheses derived from the model.