On the Pricing of Investable Securities and the Role of Implicit Barriers

Abstract

Academics and practitioners implicitly assume that investable emerging market securities are priced in the global context. However the removal of explicit barriers may not necessarily result in increased market integration if implicit barriers are also important. To test this proposition, we use the conditional version of the Chaieb and Errunza (2007) model that allows for segmentation and purchasing power parity deviations, to estimate the pricing of IFC investable indices from eight emerging markets. Our results suggests that reduction in explicit barriers in conjunction with market liberalization does not lead to global pricing of investable indices. Local risk factors are important, an indication that these securities are still a separate asset class in global portfolios. Initial evidence suggests that the hindrance to financial globalization is related to corporate governance characteristics of the country.