What Segments Equity Markets?
60 Pages Posted: 27 Dec 2010
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What Segments Equity Markets?
What Segments Equity Markets?
Date Written: December 2010
Abstract
We propose a new, valuation-based measure of world equity market segmentation. While we observe decreased levels of segmentation in many developing countries, the level of segmentation is still significant. In contrast to previous research, we characterize the factors that account for variation in market segmentation both through time as well as across countries. While a country's regulation with respect to foreign capital flows is important in determining its level of segmentation, we find that non-regulatory factors are also related to the cross-sectional and time-series variation in the level of segmentation. We identify a country's political risk profile and its stock market development as two additional local segmentation factors as well as the U.S. corporate credit spread as a global segmentation factor.
Keywords: capital controls, earnings yield, financial development, financial openness, globalization, market integration, political risk, quality of institutions, valuation differentials
JEL Classification: F00, F15, F21, F3, F43
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