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The pricing of country funds and their role in capital mobilization for emerging economies

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  • Diwan, Ishac
  • Errunza, Vihang
  • Senbet, Lemma W.
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    Abstract

    The authors theoretically analyze country funds, focusing on emerging economies in which capital markets are not readily accessible to outside investors. They study country-fund pricing and the associated policy implications under alternative variations on segmentation of international markets. They show that country funds traded in the developed capital markets can help promote the efficiency of pricing in the emerging capital markets and can enhance capital mobilization by local firms. These efficiency gains vary depending on the degree of the international investor's access to the emerging market securities (access effect), on the degree to which the industrialized countries'securities market span the securities offered in the emerging markets (substitution effect), and on the existing cross-border arbitrage restrictions. As a byproduct of their analysis, the authors study the reasons why country funds sell at a premium or discount relative to their net underlying asset value. They also show that the efficiency gains that arise with the development of new funds can be positive even when these funds start trading at a discount. They conclude with a catalog of policy implications, including strategies for efficiently promoting country funds. For example : in general, introducing the country fund in the advanced or developed market increases the prices of the underlying component assets traded in the originating emerging markets; as a policy matter, country funds that should be encouraged by emerging countries for introduction by fund promoters should be targeted to those local assets with imperfect or no substitutes in the advanced core markets; and in some circumstances, it may be socially optimal to subsidize the introduction of new funds that are expected to sell at a discount.

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    Bibliographic Info

    Paper provided by The World Bank in its series Policy Research Working Paper Series with number 1058.

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    Date of creation: 31 Dec 1992
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    Handle: RePEc:wbk:wbrwps:1058

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    Related research

    Keywords: International Terrorism&Counterterrorism; Economic Theory&Research; Access to Markets; Markets and Market Access; Banks&Banking Reform;

    References

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    1. J. Bradford De Long & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, . "Noise Trader Risk in Financial Markets," J. Bradford De Long's Working Papers _124, University of California at Berkeley, Economics Department.
    2. Summers, Lawrence H, 1986. " Does the Stock Market Rationally Reflect Fundamental Values?," Journal of Finance, American Finance Association, vol. 41(3), pages 591-601, July.
    3. Rubinstein, Mark E., 1973. "Corporate Financial Policy in Segmented Securities Markets," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 8(05), pages 749-761, December.
    4. Lee, Charles M C & Shleifer, Andrei & Thaler, Richard H, 1991. " Investor Sentiment and the Closed-End Fund Puzzle," Journal of Finance, American Finance Association, vol. 46(1), pages 75-109, March.
    5. Merton, Robert C, 1987. " A Simple Model of Capital Market Equilibrium with Incomplete Information," Journal of Finance, American Finance Association, vol. 42(3), pages 483-510, July.
    6. Mauer, David C. & Senbet, Lemma W., 1992. "The Effect of the Secondary Market on the Pricing of Initial Public Offerings: Theory and Evidence," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 27(01), pages 55-79, March.
    7. Shiller, Robert J, 1981. "Do Stock Prices Move Too Much to be Justified by Subsequent Changes in Dividends?," American Economic Review, American Economic Association, vol. 71(3), pages 421-36, June.
    8. Errunza, Vihang R & Senbet, Lemma W, 1981. "The Effects of International Operations on the Market Value of the Firm: Theory and Evidence," Journal of Finance, American Finance Association, vol. 36(2), pages 401-17, May.
    9. Errunza, Vihang & Losq, Etienne, 1985. " International Asset Pricing under Mild Segmentation: Theory and Test," Journal of Finance, American Finance Association, vol. 40(1), pages 105-24, March.
    10. Black, Fischer, 1974. "International capital market equilibrium with investment barriers," Journal of Financial Economics, Elsevier, vol. 1(4), pages 337-352, December.
    11. Alexander, Gordon J & Eun, Cheol S & Janakiramanan, S, 1987. " Asset Pricing and Dual Listing on Foreign Capital Markets: A Note," Journal of Finance, American Finance Association, vol. 42(1), pages 151-58, March.
    12. Bonser-Neal, Catherine, et al, 1990. " International Investment Restrictions and Closed-End Country Fund Prices," Journal of Finance, American Finance Association, vol. 45(2), pages 523-47, June.
    13. Brauer, Greggory A, 1988. " Closed-End Fund Shares' Abnormal Returns and the Information Content of Discounts and Premiums," Journal of Finance, American Finance Association, vol. 43(1), pages 113-127, March.
    14. Malkiel, Burton G, 1977. "The Valuation of Closed-End Investment-Company Shares," Journal of Finance, American Finance Association, vol. 32(3), pages 847-59, June.
    15. Lintner, John, 1971. "Expectations, Mergers and Equilibrium in Purely Competitive Securities Markets," American Economic Review, American Economic Association, vol. 61(2), pages 101-11, May.
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    Cited by:
    1. Gikas Hardouvelis & Rafael La Porta & Thierry A. Wizman, 1994. "What Moves the Discount on Country Equity Funds?," NBER Chapters, in: The Internationalization of Equity Markets, pages 345-403 National Bureau of Economic Research, Inc.
    2. Diwan, Ishac & Errunza, Vihang & Senbet, Lemma W., 1993. "Empirical perspectives on national index funds," Policy Research Working Paper Series 1206, The World Bank.
    3. Goldstein, Morris, 1995. "Coping with too much of a good thing : policy responses for large capital inflows in developing countries," Policy Research Working Paper Series 1507, The World Bank.

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