Working Paper: CEPR ID: DP8142
Authors: Geert Bekaert; Campbell Harvey; Christian T. Lundblad; Stephan Siegel
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 Codes: F00; F15; F21; F3; F43
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| regulatory changes promoting financial and trade openness (F30) | market segmentation levels (R20) |
| political risk (P26) | market segmentation levels (R20) |
| stock market development (G10) | market segmentation levels (R20) |
| US corporate credit spread (G39) | market segmentation levels (R20) |