Vihang R. Errunza

Market Segmentation and the Cost of the Capital in International Equity Markets

While theoretical models predict a decrease in the cost of capital from depositary receipt offerings, the economic benefits of this liberalization have been difficult to quantify, Using a sample of 126 firms from 32 countries, we document a significant decline of 42% in the cost of capital. In addition, we show the decline is driven by the ability of U.S. investors to span the foreign security prior to cross-listing. Our findings support eh hypothesis that financial market liberalizations have significant economic benefits.

Characterizing World Market Integration through Time

International asset pricing models suggest that barriers to portfolio flows and availability of market substitutes affect the degree and time variation of world market integration. We use GARCH-in-mean methodology to assess the evolution in market integration for eight emerging markets over the period 1977–2000. Our results suggest that while local risk is still a relevant factor in explaining time variation of emerging market returns, none of the countries appear to be completely segmented. We find that there are substantial crossmarket differences in the degree of integration. The evolution toward more integrated financial markets is apparent although at times we do observe reversals. In addition, we provide clear evidence on the impropriety of directly using correlations of market-wide index returns as a measure of market integration. Finally, financial market development and financial liberalization policies play important roles in integrating emerging markets.

Can the Gains from International Diversification Be Achieved without Trading Abroad

We examine whether portfolios of domestically traded securities can mimic foreign indices so that investment in assets that trade only abroad is not necessary to exhaust the gains from international diversification. We use monthly data from 1976 to 1993 for seven developed and nine emerging markets. Return correlations, mean-variance spanning, and Sharpe ratio test results provide strong evidence that gains beyond those attainable through home-made diversification have become statistically and economically insignificant. Finally, we show that the incremental gains from international diversification beyond home-made diversification portfolios have diminished over time in a way consistent with changes in investment barriers. Copyright The American Finance Association 1999.

Is the Potential for International Diversification Disappearing? A Dynamic Copula Approach

International equity markets are characterized by nonlinear dependence and asymmetries. We propose a new dynamic asymmetric copula model to capture long-run and short-run dependence, multivariate nonnormality, and asymmetries in large cross-sections. We find that copula correlations have increased markedly in both developed markets (DMs) and emerging markets (EMs), but they are much lower for EMs than for DMs. Tail dependence has also increased but its level is still relatively low for EMs. We propose new measures of dynamic diversi?cation bene?ts that take into account higher order moments and nonlinear dependence. The bene?fits from international diversi?cation have reduced over time, drastically so for DMs. EMs still offer signi?cant diversi?cation bene?ts, especially during large market downturns.

Tests of integration, mild segmentation and segmentation hypotheses☆

Abstract To investigate the structure of world capital markets, this paper tests the competing hypotheses of integration, mild segmentation and segmentation for a group of emerging markets. The test is based on the theoretical model of Errunza and Losq and uses the mle procedure. The results provide strong evidence in favor of a nonpolar structure and the widely accepted notion that the world market is neither fully integrated nor completely segmented.

Foreign Portfolio Equity Investments, Financial Liberalization, and Economic Development

Reform of local capital markets and relaxation of capital controls to attract foreign portfolio investments (FPIs) has become an integral part of development strategy. The proximity of market openings and large, sudden shifts in international capital flows gave credence to the notion that the liberalization was the primary culprit in precipitating the recent Asian crisis. Hence, this paper reassesses the benefits and costs of FPIs from the perspective of the recipients. Specifically, it discusses the various FPI contributions and presents empirical evidence regarding the relationship between FPIs and market development, degree of capital market integration, cost of capital, cross-market correlation and market volatility. It is clear that the evidence on benefits of FPIs is strong, whereas the policy concerns regarding resource mobilization, market comovements, contagion, and volatility are largely unwarranted. The authors make some policy suggestions regarding preconditions for capital market openings, market regulation, and liberalization sequencing. Copyright 2001 by Blackwell Publishing Ltd.

Does Corporate International Diversification Destroy Value? Evidence from Cross-Border Mergers and Acquisitions

This paper investigates the valuation effects of corporate international diversification by examining cross-border mergers and acquisitions of U.S. acquirers over the period 1990-1999. We find that, on average, acquisitions of “fairly valued” foreign business units do not lead to value discounts. Consistent with industrial diversification discount literature, unrelated crossborder acquisitions result in a significant diversification discount of about 24 percent after accounting for valuation of foreign targets. Furthermore, significant wealth gains accrue to foreign target shareholders regardless of the type of acquisition. Overall, our results suggest that international diversification does not destroy value while industrial diversification leads to discounts even after controlling for the pre-acquisition value of the target.

The behavior of stock prices on LDC markets

Abstract The paper investigates the behavior of stock prices for a group of well established and newly emerging LDC securities markets. The results suggest the probability distributions to be consistent with a lognormal distribution with some securities exhibiting non-stationary variance. LDC markets, even though not as efficient as major DC markets, are quite comparable to the smaller European markets and the behavior of security prices as reported in this study appears to be generalizable for the heavily traded segments of LDC markets.

Macroeconomic Determinants of European Stock Market Volatility

In this paper we investigate whether macroeconomic variability can explain time variation in European stock market volatility. We find that unlike the documented case of the USA, in many cases, the time variation in stock market volatility is found to be significantly affected by the past variability of either monetary or real macroeconomic factors. Our findings have important implications for capital and portfolio allocations.

The Pricing of Country Funds from Emerging Markets: Theory and Evidence

This paper provides a theoretical and empirical analysis of country funds focusing on emerging economies whose capital markets are not readily accessible to outside investors. We study country fund pricing and the associated policy implications under alternative variations of international market structure segmentation. We show that country funds traded in the developed capital markets can be beneficial in promoting the efficiency of pricing in the emerging capital markets and in enhancing capital mobilization by local firms. These efficiency gains vary depending upon the degree to which the emerging market securities are spanned by the core or advanced market securities, and cross-border arbitrage restrictions. A country fund premium or discount arises in our framework owing to access and substitution effects characterizing the relationship between the host and emerging markets. We present some empirical evidence supporting our principal predictions. In particular, we investigate the issues of country fund pricing, relative influences of the home market, the international market, the global closed-end fund factor, and the behavior of fund premia/discounts.