A Joint Test of Market Segmentation and Exchange Risk Factor in International Capital Markets

JOURNAL OF INTERNATIONAL BUSINESS STUDIES, Vol. 27, No. 2, Spring 1997

Posted: 16 Oct 1997

See all articles by Murli Rajan

Murli Rajan

University of Scranton

Jongmoo Jay Choi

Temple University; National Bureau of Economic Research (NBER); Temple University - International Business

Abstract

Market segmentation and exchange risk are two main factors that distinguish international financing and investment decisions from domestic ones. Existing studies of market segmentation have been conducted within a framework in which exchange risk is not explicitly recognized. This paper performs a joint test of market segmentation and exchange risk pricing based on individual stock data from seven major countries outside of the U.S. for the period January 1981 to December 1989. The theoretical framework used is a multifactor model with domestic and world market factors and an exchange risk factor. The maximum likelihood method is used to estimate risk premia, and factor analysis is used to provide additional evidence on the pricing of risk factors. The results indicate that 1) the factor structure of asset returns is internationally heterogeneous, 2) many national capital markets can be described as partially segmented, rather than the polar cases of complete segmentation or integration, and 3) exchange risk is a significant factor affecting asset returns in addition to the domestic and world market risk factors.

JEL Classification: F31, G12

Suggested Citation

Rajan, Murli and Choi, Jongmoo Jay, A Joint Test of Market Segmentation and Exchange Risk Factor in International Capital Markets. JOURNAL OF INTERNATIONAL BUSINESS STUDIES, Vol. 27, No. 2, Spring 1997. Available at SSRN: https://ssrn.com/abstract=10931

Murli Rajan

University of Scranton ( email )

Bethlehem, PA 18015-3118
United States

Jongmoo Jay Choi (Contact Author)

Temple University ( email )

Fox School of Business
Temple University
Philadelphia, PA 19122
United States
215-204-5084 (Phone)
215-204-1697 (Fax)

HOME PAGE: http://astro.temple.edu/~jjchoi

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Temple University - International Business ( email )

Philadelphia, PA 19122
United States

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