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A Joint Test of Market Segmentation and Exchange Risk Factor in International Capital Market

Author

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  • Jongmoo Jay Choi

    (Temple University)

  • Murli Rajan

    (University of Scranton)

Abstract

Market segmentation and exchange risk are two main factors that distinguish international financing and investment decisions from domestic ones. Existing studies of market segmentation have been conducted within a framework in which exchange risk is not explicitly recognized. This paper performs a joint test of market segmentation and exchange risk pricing based on individual stock data from seven major countries, outside of the U.S., for the period January 1981 to December 1989. The theoretical framework used is a multifactor model with domestic and world market factors and an exchange risk factor. The maximum likelihood method is used to estimate risk premia, and factor analysis is used to provide additional evidence on the pricing of risk factors. The results indicate that (a) the factor structure of asset returns is internationally heterogeneous, (b) many national capital markets can be described as partially segmented, rather than the polar cases of complete segmentation or integration, and (c) exchange risk is a significant factor affecting asset returns in addition to the domestic and world market risk factors.© 1997 JIBS. Journal of International Business Studies (1997) 28, 29–49

Suggested Citation

  • Jongmoo Jay Choi & Murli Rajan, 1997. "A Joint Test of Market Segmentation and Exchange Risk Factor in International Capital Market," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 28(1), pages 29-49, March.
    • Handle: RePEc:pal:jintbs:v:28:y:1997:i:1:p:29-49
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    Cited by:

    1. Myers, Matthew B. & Droge, Cornelia & Cheung, Mee Shew, 2007. "The fit of home to foreign market environment: An exploratory study of the relationship of congruence to performance," Journal of World Business, Elsevier, vol. 42(2), pages 170-183, June.
    2. Gadanecz, Blaise & Miyajima, Ken & Shu, Chang, 2018. "Emerging market local currency sovereign bond yields: The role of exchange rate risk," International Review of Economics & Finance, Elsevier, vol. 57(C), pages 371-401.
    3. Al-Shboul, Mohammad & Anwar, Sajid, 2014. "Pricing of the currency risk in the Canadian equity market," Research in International Business and Finance, Elsevier, vol. 30(C), pages 173-194.
    4. Andrea Carolina Vargas-Páez & Carlos David Ardila-Dueñas, 2021. "Efecto del riesgo de tipo de cambio en la rentabilidad de los bonos soberanos en Colombia," Borradores de Economia 1165, Banco de la Republica de Colombia.
    5. Kodongo, Odongo & Ojah, Kalu, 2011. "Foreign exchange risk pricing and equity market segmentation in Africa," Journal of Banking & Finance, Elsevier, vol. 35(9), pages 2295-2310, September.
    6. Gangemi, Michael A. M. & Brooks, Robert D. & Faff, Robert W., 2000. "Modeling Australia's country risk: a country beta approach," Journal of Economics and Business, Elsevier, vol. 52(3), pages 259-276.
    7. Jongmoo Choi & Elyas Elyasiani, 1997. "Derivative Exposure and the Interest Rate and Exchange Rate Risks of U.S. Banks," Journal of Financial Services Research, Springer;Western Finance Association, vol. 12(2), pages 267-286, October.
    8. Purkayastha, Anish & Kumar, Vikas, 2021. "Internationalization through foreign listing: A review and future research agenda," Journal of World Business, Elsevier, vol. 56(3).
    9. Chris Bilson & Tim Brailsford & Aiden Hallett & Jing Shi, 2012. "The impact of terrorism on global equity market integration," Australian Journal of Management, Australian School of Business, vol. 37(1), pages 47-60, April.
    10. Caporale, Guglielmo Maria & Menla Ali, Faek & Spagnolo, Nicola, 2015. "Exchange rate uncertainty and international portfolio flows: A multivariate GARCH-in-mean approach," Journal of International Money and Finance, Elsevier, vol. 54(C), pages 70-92.
    11. Azher, Sara & Iqbal, Javed, 2016. "Pricing of foreign exchange risk and market segmentation: Evidence from Pakistan's equity market," Journal of Asian Economics, Elsevier, vol. 43(C), pages 37-48.
    12. Richard Heaney & Vince Hooper, 1999. "World, Regional and Political Risk Influences Upon Asia Pacific Equity Market Returns," Australian Journal of Management, Australian School of Business, vol. 24(2), pages 131-142, December.
    13. Ragunathan, Vanitha, 1999. "Financial deregulation and integration: an Australian perspective1," Journal of Economics and Business, Elsevier, vol. 51(6), pages 505-514.
    14. Tai, Chu-Sheng, 2007. "Market integration and currency risk in Asian emerging markets," Research in International Business and Finance, Elsevier, vol. 21(1), pages 98-117, January.
    15. Chung, Hyunchul & Majerbi, Basma & Rizeanu, Sorin, 2015. "Exchange risk premia and firm characteristics," Emerging Markets Review, Elsevier, vol. 22(C), pages 96-125.
    16. Tai, Chu-Sheng, 2000. "Time-varying market, interest rate, and exchange rate risk premia in the US commercial bank stock returns," Journal of Multinational Financial Management, Elsevier, vol. 10(3-4), pages 397-420, December.
    17. Piotr Wdowinski, 2004. "Determinants of Country Beta Risk in Poland," CESifo Working Paper Series 1120, CESifo.
    18. Peter W. Liesch & Lars Håkanson & Sara L. McGaughey & Stuart Middleton & Julia Cretchley, 2011. "The evolution of the international business field: a scientometric investigation of articles published in its premier journal," Scientometrics, Springer;Akadémiai Kiadó, vol. 88(1), pages 17-42, July.
    19. Kodongo, Odongo & Ojah, Kalu, 2014. "Conditional pricing of currency risk in Africa's equity markets," Emerging Markets Review, Elsevier, vol. 21(C), pages 133-155.
    20. Boamah, Nicholas Addai & Watts, Edward J. & Loudon, Geoffrey, 2016. "Investigating temporal variation in the global and regional integration of African stock markets," Journal of Multinational Financial Management, Elsevier, vol. 36(C), pages 103-118.
    21. Choi, Jongmoo Jay & Jeon, Bang Nam, 2007. "Financial factors in foreign direct investments: A dynamic analysis of international data," Research in International Business and Finance, Elsevier, vol. 21(1), pages 1-18, January.

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