Further Evidence on Closed‐End Country Fund Prices and International Capital Flows*

Abstract

Using cointegration analysis I establish a long‐run relationship between country fund premiums and international capital flows in six out of 10 emerging markets and in two out of seven developed markets examined. This relationship is explored to derive an intuitive measure of capital market segmentation that accounts for investment barriers and does not rely on a specific asset pricing model. I find that most emerging markets are segmented, but some exhibit a clear trend toward integration, whereas most developed countries exhibit no evidence of segmentation. The segmentation measure reveals that the process toward integration is gradual and can be reversed.