Forum for Science, Industry and Business

Sponsored by:     3M 
Search our Site:

 

Study proposes new measure of world equity market segmentation

27.02.2012
A recent study in the Review of Financial Studies proposes a new, valuation-based measure of equity market segmentation. Equity market segmentation occurs when stocks of similar risk in different countries are priced differently.

The study, by Columbia Business School Professor Geert Bekaert, Chazen Senior Scholar at The Jerome A. Chazen Institute of International Business at Columbia Business School and the Leon G. Cooperman Professor of Finance and Economics, uncovers the factors that cause variation in market segmentation, both through time and across countries.

Although barriers to capital flows often lead to equity market segmentation, a country's political risk profile and its stock market development are two particularly important local factors behind a lack of integration, Bekaert and his coauthors found. In addition, the U.S. corporate credit spread is an important factor on a global level. The study is coauthored by Campbell R. Harvey, J. Paul Sticht Professor in International Business, Fuqua School of Business, Duke University; Christian T. Lundblad, Edward M. O'Herron Distinguished Scholar and Associate Professor of Finance, Kenan-Flagler Business School, University of North Carolina; and Stephan Siegel, University of Washington Business School.

The removal of capital controls in developed countries in the 1980s and in emerging markets in the 1980s and early 1990s has led to a new era of global financial openness and trade. These changes should have had a profound effect on the valuations of stocks across the world, and therefore impact critical economic issues such as the cost of capital. However, although many countries have experienced decreased segmentation, significant levels of segmentation remain in emerging markets, the authors found.

In the study, the authors describe their new way of measuring the degree of effective or de facto equity market segmentation. Unlike most existing measures, the authors' framework is not tied to a specific asset pricing model. Instead, this country-level measure is based on industry earnings yield differentials, aggregated across all industries in a given country. With this new measure, it is easier to understand why one country is more segmented than another, and why this degree of segmentation changes over time.

Using this new measure, the authors test the degree that local and global factors account for valuation, after controlling for a country's global growth opportunities in its mix of industries. A main driver of segmentation is de jure access: some markets are simply closed by law to foreign investment. Yet even when a country is formally open, foreign investors may shun markets with weak corporate governance. The authors found that while equity market openness is the single most important economic variable in segmentation, stock market development is almost as important. Exploring segmentation at the industry level, the authors found that historically heavily regulated industries such as banking and insurance were among the least integrated early in their sample timeframe, but are now among the most integrated.

The authors used data from the United States, an effectively integrated economy, as a benchmark, and applied their new measure to 69 countries using monthly equity industry portfolio data from Datastream and firm-level data from the Standard & Poor's Emerging Markets Database across a time period of more than 20 years. The study documents the extent to which market segmentation has decreased over time, and shows that while developed countries have been effectively integrated since 1993, emerging markets continue to demonstrate levels of segmentation above the U.S. benchmark. As discount rates and growth opportunities become global in nature, this new measure of the absolute difference between local and global valuation ratios will shrink, the authors conclude.

About Columbia Business School
Led by Dean Glenn Hubbard, the Russell L. Carson Professor of Finance and Economics, Columbia Business School is at the forefront of management education for a rapidly changing world. The school's cutting-edge curriculum bridges academic theory and practice, equipping students with an entrepreneurial mindset to recognize and capture opportunity in a competitive business environment. Beyond academic rigor and teaching excellence, the school offers programs that are designed to give students practical experience making decisions in real0world environments. The school offers MBA and Executive MBA (EMBA) degrees, as well as non-degree Executive Education programs. For more information, visit www.gsb.columbia.edu.

Sona Rai | EurekAlert!
Further information:
http://www.columbia.edu

More articles from Business and Finance:

nachricht How Strong Brands Translate into Money
15.11.2016 | Kühne Logistics University - Wissenschaftliche Hochschule für Logistik und Unternehmensführung

nachricht Demographic change depresses tax revenues
04.11.2016 | Fraunhofer-Institut für Angewandte Informationstechnik FIT

All articles from Business and Finance >>>

The most recent press releases about innovation >>>

Die letzten 5 Focus-News des innovations-reports im Überblick:

Im Focus: Significantly more productivity in USP lasers

In recent years, lasers with ultrashort pulses (USP) down to the femtosecond range have become established on an industrial scale. They could advance some applications with the much-lauded “cold ablation” – if that meant they would then achieve more throughput. A new generation of process engineering that will address this issue in particular will be discussed at the “4th UKP Workshop – Ultrafast Laser Technology” in April 2017.

Even back in the 1990s, scientists were comparing materials processing with nanosecond, picosecond and femtosesecond pulses. The result was surprising:...

Im Focus: Shape matters when light meets atom

Mapping the interaction of a single atom with a single photon may inform design of quantum devices

Have you ever wondered how you see the world? Vision is about photons of light, which are packets of energy, interacting with the atoms or molecules in what...

Im Focus: Novel silicon etching technique crafts 3-D gradient refractive index micro-optics

A multi-institutional research collaboration has created a novel approach for fabricating three-dimensional micro-optics through the shape-defined formation of porous silicon (PSi), with broad impacts in integrated optoelectronics, imaging, and photovoltaics.

Working with colleagues at Stanford and The Dow Chemical Company, researchers at the University of Illinois at Urbana-Champaign fabricated 3-D birefringent...

Im Focus: Quantum Particles Form Droplets

In experiments with magnetic atoms conducted at extremely low temperatures, scientists have demonstrated a unique phase of matter: The atoms form a new type of quantum liquid or quantum droplet state. These so called quantum droplets may preserve their form in absence of external confinement because of quantum effects. The joint team of experimental physicists from Innsbruck and theoretical physicists from Hannover report on their findings in the journal Physical Review X.

“Our Quantum droplets are in the gas phase but they still drop like a rock,” explains experimental physicist Francesca Ferlaino when talking about the...

Im Focus: MADMAX: Max Planck Institute for Physics takes up axion research

The Max Planck Institute for Physics (MPP) is opening up a new research field. A workshop from November 21 - 22, 2016 will mark the start of activities for an innovative axion experiment. Axions are still only purely hypothetical particles. Their detection could solve two fundamental problems in particle physics: What dark matter consists of and why it has not yet been possible to directly observe a CP violation for the strong interaction.

The “MADMAX” project is the MPP’s commitment to axion research. Axions are so far only a theoretical prediction and are difficult to detect: on the one hand,...

All Focus news of the innovation-report >>>

Anzeige

Anzeige

Event News

ICTM Conference 2017: Production technology for turbomachine manufacturing of the future

16.11.2016 | Event News

Innovation Day Laser Technology – Laser Additive Manufacturing

01.11.2016 | Event News

#IC2S2: When Social Science meets Computer Science - GESIS will host the IC2S2 conference 2017

14.10.2016 | Event News

 
Latest News

NTU scientists build new ultrasound device using 3-D printing technology

07.12.2016 | Health and Medicine

The balancing act: An enzyme that links endocytosis to membrane recycling

07.12.2016 | Life Sciences

How to turn white fat brown

07.12.2016 | Health and Medicine

VideoLinks
B2B-VideoLinks
More VideoLinks >>>