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 Microtechnology industry is hiring – positive developments of past years continue
09.04.2018 | IVAM Fachverband für Mikrotechnik

nachricht RWI/ISL-Container Throughput Index with minor decline on a high overall level
20.03.2018 | RWI – Leibniz-Institut für Wirtschaftsforschung

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: Lethal combination: Drug cocktail turns off the juice to cancer cells

A widely used diabetes medication combined with an antihypertensive drug specifically inhibits tumor growth – this was discovered by researchers from the University of Basel’s Biozentrum two years ago. In a follow-up study, recently published in “Cell Reports”, the scientists report that this drug cocktail induces cancer cell death by switching off their energy supply.

The widely used anti-diabetes drug metformin not only reduces blood sugar but also has an anti-cancer effect. However, the metformin dose commonly used in the...

Im Focus: New Foldable Drone Flies through Narrow Holes in Rescue Missions

A research team from the University of Zurich has developed a new drone that can retract its propeller arms in flight and make itself small to fit through narrow gaps and holes. This is particularly useful when searching for victims of natural disasters.

Inspecting a damaged building after an earthquake or during a fire is exactly the kind of job that human rescuers would like drones to do for them. A flying...

Im Focus: Topological material switched off and on for the first time

Key advance for future topological transistors

Over the last decade, there has been much excitement about the discovery, recognised by the Nobel Prize in Physics only two years ago, that there are two types...

Im Focus: Researchers develop method to transfer entire 2D circuits to any smooth surface

What if a sensor sensing a thing could be part of the thing itself? Rice University engineers believe they have a two-dimensional solution to do just that.

Rice engineers led by materials scientists Pulickel Ajayan and Jun Lou have developed a method to make atom-flat sensors that seamlessly integrate with devices...

Im Focus: Three components on one chip

Scientists at the University of Stuttgart and the Karlsruhe Institute of Technology (KIT) succeed in important further development on the way to quantum Computers.

Quantum computers one day should be able to solve certain computing problems much faster than a classical computer. One of the most promising approaches is...

All Focus news of the innovation-report >>>

Anzeige

Anzeige

VideoLinks
Industry & Economy
Event News

ICTM Conference 2019: Digitization emerges as an engineering trend for turbomachinery construction

12.12.2018 | Event News

New Plastics Economy Investor Forum - Meeting Point for Innovations

10.12.2018 | Event News

EGU 2019 meeting: Media registration now open

06.12.2018 | Event News

 
Latest News

New discoveries predict ability to forecast dementia from single molecule

12.12.2018 | Health and Medicine

CCNY-Yale researchers make shape shifting cell breakthrough

12.12.2018 | Physics and Astronomy

Pain: Perception and motor impulses arise in the brain independently of one another

12.12.2018 | Health and Medicine

VideoLinks
Science & Research
Overview of more VideoLinks >>>