Emerging Market Finance

Integrated market: no barrier

Segmented market: completely isolated

Financial liberalization: free cash flow and asset of the same risk offers the same return

(in developmental economic, liberalization means privatization and bank reforms)

In segmented market: equity price low because variance is high

In integrated market: equity price is high because covariance is low, beta is the only priced risk so expected return is low

From segmented to integrated, equity price increases, expected return decreases

Segmentation help diversification

Liberalization: increases GDP, firm efficiency (corporate governance or lower cost of capital due to lower risk in covariance instead of variance), less country debt, decreased volatility and less consumption bubbles

Contagion

Non-normal return with structural breaks in historical data

Microstructure affects market efficiency – information can be incorporated into prices through transaction cost, liquidity and execution speed