Capital Markets and Foreign Ownership Restrictions: An Empirical Analysis of Emerging Stock Markets

In the 1990s, the hot issue in international finance was the growing interest of portfolio managers in the emerging stock markets. The interest in the emerging markets gained rapid attention, which is evident from the global trends, towards the opening up of economies and financial markets, free capital flow and the privatisation of financial institutions. Earlier the emerging markets were isolated due to several factors that had posed serious problems for international investors. These markets lacked the depth, regulatory framework, and structural safeguards that had characterised the equity markets in the developed world. Capital markets are called integrated, if assets with perfectly correlated rates of returns have the same price regardless of the location in which they are traded. Alternatively, capital market are called segmented, if financial assets traded in different markets “with identical risk characteristics” have different returns due to different investment restrictions.1 Segmentation may be due to individuals’ attitudes, government restrictions over capital movements or irrationality.