Abstract
Using a sample of emerging market closed-end funds, I find evidence that indirect investment barriers exert powerful effects, opposite to the effects of capital controls, on asset pricing differences across countries. I show that not only do indirect investment barriers contribute to international capital market segmentation, but they can lead to segmentation even in the absence of strong capital inflow restrictions. This result is consistent with Bekaert and Harvey's (1995) conclusion that other markets appear segmented even though foreigners have relatively free access to their capital markets. The empirical results of this paper provide a rational market segmentation explanation of both premiums and discounts in emerging market closed-end funds, and they are consistent with the deterrent effect of indirect barriers on equity flows to emerging markets found in the capital flow literature. Keywords: market segmentation, emerging markets, capital controls, indirect investment barriers, closed-end country funds
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