Do Implicit Barriers Matter for Globalization?

Abstract

Market liberalization may not result in global pricing or full market integration if implicit barriers are important. We test this proposition for 22 emerging markets using the conditional version of Errunza and Losq (1985) model. We estimate and compare the degree of integration for stocks that are eligible for purchase by foreigners (investible) and those that are not (non-investible). Our results show that local factors are priced for both segments and the implicit barriers are significantly associated with the integration measure. Specifically, better institutions, stronger corporate governance and more transparent markets would jointly contribute to a higher degree of integration by about 15-20 percent.

Keywords: International Asset Pricing, Emerging Markets, Market Integration, Liberalization, Globalization

JEL Classification: G15, F30, G30