Barriers to Portfolio Flows, Short Sales Constraints and International Asset Pricing: Theory and Evidence

Abstract:     
We propose an international asset pricing model in a two-country framework where trading in the foreign market encounters barriers to portfolio flows and short-sale constraints. Under ownership restrictions, free assets are priced with a global risk premium whereas the restricted assets command a global risk premium, a conditional risk premium and a conditional discount. With binding ownership and short-sale constraints, some foreign assets become non-tradeable, however, pricing rules are not altered. We estimate our model using maximum likelihood approach for 18 major emerging markets over the period 1989-2007 and find strong support for our model.

Number of Pages in PDF File: 48

Keywords: International Asset Pricing, Foreign Ownership Restrictions, Short Sales Constraints, Emerging Markets

JEL Classification: F39, G12, G15

working papers series