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

Abstract

This paper establishes a direct link between country fund premiums and international capital flows in six out of ten emerging markets and in two out of seven developed markets examined. In the absence of investment barriers and capital market segmentation there would be no such relationship. This relationship is explored to derive an intuitive measure of segmentation that accounts for investment barriers and does not rely on a specific asset pricing model. The paper finds that most emerging markets are segmented, but som exhibit a clear trend towards integration, whereas most developed countries do not exhibit any evidence of segmentation. The paper also shows that the process towards capital market integration is gradual, takes time, and can be reversed.