Hostname: page-component-586b7cd67f-tf8b9 Total loading time: 0 Render date: 2024-12-02T13:25:03.503Z Has data issue: false hasContentIssue false
  • English
  • Français

The Impact of Investability on Asset Valuation

Published online by Cambridge University Press:  09 December 2015

Vihang Errunza  and
Hai Ta
Vihang Errunza*
Affiliation:
[email protected], McGill University, Desautels Faculty of Management, Montreal PQ H3A 1G5, Canada
Hai Ta
Affiliation:
[email protected], University of Winnipeg, Faculty of Business Administration and Economics, Winnipeg MB R3B 2E9, Canada.
*
*Corresponding author: [email protected]
Get access Rights & Permissions [Opens in a new window]

Abstract

We develop an international asset pricing model to measure the impact of investability constraints on asset pricing. For a sample of 18 emerging markets, we use Standard & Poor’s investable weight factor (IWF) to show a 26.33% reduction in the cost of equity capital when non-investable firms become partially investable, with a further 12.51% reduction when partially investable firms become unrestricted. We demonstrate the generality and usefulness of the IWF by examining stocks with global/American depositary receipts and foreign institutional holdings as alternate investability proxies. Our results provide strong evidence of the economic benefits of market liberalization policies.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 50 , Issue 5 , October 2015 , pp. 1135 - 1163
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2015 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Adler, M., and Dumas, B.. “International Portfolio Selection and Corporation Finance: A Synthesis.” Journal of Finance, 38 (1983), 925–984.Google Scholar
Andrade, S. C. “A Model of Asset Pricing under Country Risk.” Journal of International Money and Finance, 28 (2009), 671–695.Google Scholar
Bae, K. H.; Chan, K.; and Ng, A.. “Investability and Return Volatility.” Journal of Financial Economics, 71 (2004), 239–263.Google Scholar
Bae, K. H.; Ozoguz, A.; Tan, H.; and Wirjanto, T. S.. “Do Foreigners Facilitate Information Transmission in Emerging Markets?” Journal of Financial Economics, 105 (2012), 209–227.Google Scholar
Bailey, W.; Chung, Y. P.; and Kang, J.. “Foreign Ownership Restrictions and Equity Price Premiums: What Drives the Demand for Cross-Border Investments?” Journal of Financial and Quantitative Analysis, 34 (1999), 489–511.Google Scholar
Bailey, W., and Jagtiani, J.. “Foreign Ownership Restrictions and Premiums for International Investment: Some Evidence from the Thai Capital Market.” Journal of Financial Economics, 36 (1994), 57–88.Google Scholar
Bekaert, G., and Harvey, C. R.. “Time-Varying World Market Integration.” Journal of Finance, 50 (1995), 403–444.Google Scholar
Bekaert, G., and Harvey, C. R.. “Foreign Speculators and Emerging Equity Markets.” Journal of Finance, 55 (2000), 565–613.Google Scholar
Bekaert, G.; Harvey, C. R.; and Lundblad, C.. “Liquidity and Expected Returns: Lessons from Emerging Markets.” Review of Financial Studies, 20 (2007), 1783–1831.Google Scholar
Bekaert, G.; Harvey, C. R.; Lundblad, C.; and Siegel, S.. “What Segments Equity Markets?” Review of Financial Studies, 24 (2011), 3847–3890.Google Scholar
Bekaert, G., and Wu, G.. “Asymmetric Volatility and Risks in Equity Markets.” Review of Financial Studies, 13 (2000), 1–42.Google Scholar
Bollerslev, T., and Wooldridge, J. M.. “Quasi-Maximum Likelihood Estimation and Inference in Dynamic Models with Time-Varying Covariance.” Economic Review, 11 (1992), 143–172.Google Scholar
Bonser-Neal, C.; Brauer, G.; Neal, R.; and Wheatley, S.. “International Investment Restrictions and Closed-End Country Fund Prices.” Journal of Finance, 45 (1990), 523–547.Google Scholar
Cappiello, L.; Engle, R. F.; and Sheppard, K.. “Asymmetric Dynamics in the Correlations of Global Equity and Bond Returns.” Journal of Financial Econometrics, 4 (2006), 537–572.Google Scholar
Carrieri, F.; Chaieb, I. and Errunza, V.. “Do Implicit Barriers Matter for Globalization?” Review of Financial Studies, 26 (2013), 1694–1739.Google Scholar
Carrieri, F.; Errunza, V.; and Hogan, K.. “Characterizing World Market Integration through Time.” Journal of Financial Quantitative Analysis, 42 (2007), 915–940.Google Scholar
Chaieb, I., and Errunza, V.. “International Asset Pricing under Segmentation and PPP Deviations.” Journal of Financial Economics, 86 (2007), 543–578.Google Scholar
Chari, A., and Henry, P. B.. “Risk Sharing and Asset Prices: Evidence from a Natural Experiment.” Journal of Finance, 59 (2004), 1295–1324.Google Scholar
De Jong, F., and de Roon, F. A.. “Time-Varying Market Integration and Expected Returns in Emerging Markets.” Journal of Financial Economics, 78 (2005), 583–613.Google Scholar
De Santis, G., and Gerard, B.. “International Asset Pricing and Portfolio Diversification with Time-Varying Risk.” Journal of Finance, 52 (1997), 1881–1912.Google Scholar
De Santis, G., and Gerard, B.. “How Big Is the Premium for Currency Risk?” Journal of Financial Economics, 49 (1998), 375–412.Google Scholar
Dreyfus, S. E. Dynamic Programming and the Calculus of Variations. New York, NY: Academic Press (1965).Google Scholar
Dumas, B.; Lewis, K. K.; and Osambela, E.. “Differences of Opinion and International Equity Markets.” Working Paper, INSEAD (2011).Google Scholar
Dumas, B., and Solnik, B.. “The World Price of Foreign Exchange Risk.” Journal of Finance, 50 (1995), 445–479.Google Scholar
Edison, H. J., and Warnock, F. E.. “A Simple Measure of the Intensity of Capital Controls.” Journal of Empirical Finance, 10 (2003), 81–103.Google Scholar
Engle, R. F.“Wald, Likelihood Ratio, and Lagrange Multiplier Tests in Econometrics.” In Handbook of Econometrics, Vol. II, Griliches, Z. and Intriligator, M. D., eds. Amsterdam, The Netherlands: Elsevier Science BV (1984).Google Scholar
Engle, R. F., and Kroner, K. F.. “Multivariate Simultaneous Generalized ARCH.” Econometric Theory, 11 (1995), 122–150.Google Scholar
Engle, R. F., and Ng, V. K.. “Measuring and Testing the Impact of News on Volatility.” Journal of Finance, 5 (1993), 1749–1778.Google Scholar
Errunza, V., and Losq, E.. “International Asset Pricing under Mild Segmentation: Theory and Test.” Journal of Finance, 40 (1985), 105–124.Google Scholar
Eun, C. S., and Janakiramanan, S.. “A Model of International Asset Pricing with a Constraint on the Foreign Equity Ownership.” Journal of Finance, 41 (1986), 897–914.Google Scholar
Ferson, W. E., and Harvey, C. R.. “The Variation of Economic Risk Premiums.” Journal of Political Economy, 99 (1991), 385–415.Google Scholar
Ferson, W. E., and Harvey, C. R.. “The Risk and Predictability of International Equity Returns.” Review of Financial Studies, 6 (1993), 527–566.Google Scholar
Fleming, W. H., and Zariphopoulou, T.. “An Optimal Investment/Consumption Model with Borrowing.” Mathematics of Operations Research, 16 (1991), 802–822.Google Scholar
Foerster, S. R., and Karolyi, G. A.. “The Effects of Market Segmentation and Investor Recognition on Asset Prices: Evidence from Foreign Stocks Listing in the United States.” Journal of Finance, 54 (1999), 981–1013.Google Scholar
Harvey, C. R. “The World Price of Covariance Risk.” Journal of Finance, 46 (1991), 111–157.Google Scholar
Henry, P. B.“Stock Market Liberalization, Economic Reform, and Emerging Equity Market Prices.” Journal of Finance, 55 (2000), 529–564.Google Scholar
Hietala, P. “Asset Pricing in Partially Segmented Markets: Evidence from the Finnish Market.” Journal of Finance, 44 (1989), 697–718.Google Scholar
Horn, R. A., and Johnson, C. R.. Topics in Matrix Analysis, 1st ed. Cambridge, UK: Cambridge University Press (1991).Google Scholar
Hou, K.; Karolyi, G. A.; and Kho, B. C.. “What Factors Drive Global Stock Returns?” Review of Financial Studies, 24 (2011), 2527–2574.Google Scholar
Jarque, C., and Bera, A. K.. “Efficient Tests for Normality, Homoscedasticity and Serial Independence of Regression Residuals.” Economics Letters, 6 (1980), 255–259.Google Scholar
Karolyi, G. A., and Wu, Y.. “The Role of Investability Restrictions on Size, Value and Momentum in International Stock Returns.” Working Paper, Cornell University (2012).Google Scholar
Kuhn, H. W., and Tucker, A. W.. “Nonlinear Programming.”Proceedings of the 2nd Berkeley Symposium. Berkeley, CA: University of California Press (1951), 481–492.Google Scholar
Lee, K. H. “The World Price of Liquidity Risk.” Journal of Financial Economics, 99 (2011), 136–161.Google Scholar
Ljung, G., and Box, G.. “On a Measure of Lack of Fit in Time Series Models.” Biometrika, 65 (1978), 297–303.Google Scholar
Merton, R. C. “Lifetime Portfolio Selection under Uncertainty: The Continuous-Time Case.” Review of Economic Statistics, 51 (1969), 247–257.Google Scholar
Merton, R. C.“Optimum Consumption and Portfolio Rules in a Continuous-Time Model.” Journal of Economic Theory, 3 (1971), 373–413.Google Scholar
Merton, R. C. “An Intertemporal Capital Asset Pricing Model.” Econometrica, 41 (1973), 867–887.Google Scholar
Solnik, B. “An Equilibrium Model of the International Capital Market.” Journal of Economic Theory, 8 (1974), 500–524.Google Scholar
Solnik, B., and Zuo, L.. “A Global Equilibrium Asset Pricing Model with Home Preference.” Management Science, 58 (2012), 273–292.Google Scholar
Standard & Poor’s. 2012a. “S&P Dow Jones Indices: Float Adjustment Methodology.” S&P Dow Jones Indices: Index Methodology (2012a), http://us.spindices.com/documents/index-policies/methodology-sp-float-adjustment.pdf (accessed Sept. 10, 2013).Google Scholar
Standard & Poor’s. 2012b. “S&P Global BMI, S&P/IFCI Indices Methodology.” S&P Dow Jones Indices: Index Methodology (2012b), https://www.sp-indexdata.com/idpfiles/citigroup/prc/active/whitepapers/methodology-sp-global-bmi-sp-ifci-indices.pdf (accessed Sept. 10, 2013).Google Scholar
Stulz, R. M.“A Model of International Asset Pricing.” Journal of Financial Economics, 9 (1981a), 383–406.Google Scholar
Stulz, R. M.“On the Effects of Barriers to International Investment.” Journal of Finance, 36 (1981b), 923–934.CrossRefGoogle Scholar
Stulz, R. M.“Globalization, Corporate Finance, and the Cost of Capital.” Journal of Applied Corporate Finance, 12 (1999), 8–25.Google Scholar
Szpiro, G. G.“Relative Risk Aversion around the World.” Economic Letters, 20 (1986), 19–21.Google Scholar
Szpiro, G. G., and Outreville, J. F.. “Relative Risk Aversion around the World: Further Results.” Journal of Banking and Finance, 6 (1988), 127–128.Google Scholar
Von Neumann, J., and Morgenstern, O.. The Theory of Games and Economic Behavior, 2nd ed. Princeton, NJ: Princeton University Press (1947).Google Scholar
Zariphopoulou, T. “Consumption-Investment Models with Constraints.” SIAM Journal on Control and Optimization, 32 (1994), 59–85.Google Scholar
Supplementary material: PDF

Errunza and Ta supplementary material S1

Internet Appendix

Download Errunza and Ta supplementary material S1(PDF)
PDF 2.2 MB