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Capital Flow Controls, International Asset Pricing, and Investors' Welfare: A Multi-country Framework

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  • Errunza, Vihang
  • Losq, Etienne
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    Abstract

    This paper investigates the impact of capital flow restrictions on the pricing of securities, on the optimal portfolio compositions of investors of different nationalities, and on their welfare. Under capital flow controls, the equilibrium price of a security is determined jointly by its international and national risk premiums, and investors acquire nationality-specific portfolios along with a market-wide proxy for the world market portfolio. Removal of investment barriers generally leads to an increase in the aggregate market value of the affected securities, and all investors favor a move toward market integration. Introduction of different types of index funds in the world market generally increases world market integration and investor welfare. Copyright 1989 by American Finance Association.

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    Bibliographic Info

    Article provided by American Finance Association in its journal Journal of Finance.

    Volume (Year): 44 (1989)
    Issue (Month): 4 (September)
    Pages: 1025-37

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    Handle: RePEc:bla:jfinan:v:44:y:1989:i:4:p:1025-37

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    Cited by:
    1. Karen K. Lewis, 1998. "International Home Bias in International Finance and Business Cycles," NBER Working Papers 6351, National Bureau of Economic Research, Inc.
    2. Dominique Pépin, 2004. "Globalisation des marchés de capitaux et valorisation des actifs financiers," Revue économique, Presses de Sciences-Po, vol. 55(2), pages 207-226.
    3. Mishra, Anil V & Ratti, Ronald A, 2013. "Taxation of Domestic Dividend Income and Foreign Investment Holdings," MPRA Paper 50601, University Library of Munich, Germany.
    4. Bellalah, Makram & Bellalah, Mondher, 2001. "International Portfolio Choice and the Effect of Information Costs," Economics Papers from University Paris Dauphine 123456789/9786, Paris Dauphine University.
    5. El Hedi Arouri, Mohamed & Rault, Christophe & Sova, Anamaria & Sova, Robert & Teulon, Frédéric, 2013. "Market structure and the cost of capital," Economic Modelling, Elsevier, vol. 31(C), pages 664-671.
    6. Karen K. Lewis, 2011. "Global asset pricing," Globalization and Monetary Policy Institute Working Paper 88, Federal Reserve Bank of Dallas.

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