An Intertemporal Model of International Capital Market Segmentation

Suleyman Basak

48 citations0/0 files storedJournal of Financial and Quantitative Analysis

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Abstract

This paper develops an intertemporal model of international capital market segmentation. Within the model, under various forms of segmentation/integration, the equilibrium asset prices and allocations, the risk-free interest rate, and the intertemporal consumption behavior and welfares of two countries are derived and compared. It is shown that the equilibrium interest rate is increased on integration, and that integrating markets may be significantly welfare decreasing for one of the countries. Conditions that may lead to a decrease in welfare are investigated. The conclusions as to the effects of segmentation on asset prices in the mean-variance model of the existing finance segmentation literature are also shown to break down in an intertemporal model.

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References

1987A Simple Model of Capital Market Equilibrium with Incomplete Information 1989Substitution, Risk Aversion, and the Temporal Behavior of Consumption and Asset Returns: A Theoretical Framework 1978Temporal Resolution of Uncertainty and Dynamic Choice Theory 1991Learning by Doing and the Dynamic Effects of International Trade 1985International Asset Pricing under Mild Segmentation: Theory and Test 1975On the optimality of equilibrium when the market structure is incomplete 1981On the Effects of Barriers to International Investment 1989Commodity Trade and International Risk Sharing: How Much Do Financial Markets Matter?

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