Skip to main content Accessibility help
Hostname: page-component-55597f9d44-mzfmx Total loading time: 0.313 Render date: 2022-08-14T16:55:53.411Z Has data issue: true Feature Flags: { "shouldUseShareProductTool": true, "shouldUseHypothesis": true, "isUnsiloEnabled": true, "useRatesEcommerce": false, "useNewApi": true } hasContentIssue true

The Impact of Investability on Asset Valuation

Published online by Cambridge University Press:  09 December 2015

Vihang Errunza*
Affiliation:, McGill University, Desautels Faculty of Management, Montreal PQ H3A 1G5, Canada
Hai Ta
Affiliation:, University of Winnipeg, Faculty of Business Administration and Economics, Winnipeg MB R3B 2E9, Canada.
*Corresponding author:


We develop an international asset pricing model to measure the impact of investability constraints on asset pricing. For a sample of 18 emerging markets, we use Standard & Poor’s investable weight factor (IWF) to show a 26.33% reduction in the cost of equity capital when non-investable firms become partially investable, with a further 12.51% reduction when partially investable firms become unrestricted. We demonstrate the generality and usefulness of the IWF by examining stocks with global/American depositary receipts and foreign institutional holdings as alternate investability proxies. Our results provide strong evidence of the economic benefits of market liberalization policies.

Research Articles
Copyright © Michael G. Foster School of Business, University of Washington 2015 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)


Adler, M., and Dumas, B.. “International Portfolio Selection and Corporation Finance: A Synthesis.” Journal of Finance, 38 (1983), 925984.CrossRefGoogle Scholar
Andrade, S. C. “A Model of Asset Pricing under Country Risk.” Journal of International Money and Finance, 28 (2009), 671695.CrossRefGoogle Scholar
Bae, K. H.; Chan, K.; and Ng, A.. “Investability and Return Volatility.” Journal of Financial Economics, 71 (2004), 239263.CrossRefGoogle Scholar
Bae, K. H.; Ozoguz, A.; Tan, H.; and Wirjanto, T. S.. “Do Foreigners Facilitate Information Transmission in Emerging Markets?” Journal of Financial Economics, 105 (2012), 209227.CrossRefGoogle Scholar
Bailey, W.; Chung, Y. P.; and Kang, J.. “Foreign Ownership Restrictions and Equity Price Premiums: What Drives the Demand for Cross-Border Investments?” Journal of Financial and Quantitative Analysis, 34 (1999), 489511.CrossRefGoogle Scholar
Bailey, W., and Jagtiani, J.. “Foreign Ownership Restrictions and Premiums for International Investment: Some Evidence from the Thai Capital Market.” Journal of Financial Economics, 36 (1994), 5788.CrossRefGoogle Scholar
Bekaert, G., and Harvey, C. R.. “Time-Varying World Market Integration.” Journal of Finance, 50 (1995), 403444.CrossRefGoogle Scholar
Bekaert, G., and Harvey, C. R.. “Foreign Speculators and Emerging Equity Markets.” Journal of Finance, 55 (2000), 565613.CrossRefGoogle Scholar
Bekaert, G.; Harvey, C. R.; and Lundblad, C.. “Liquidity and Expected Returns: Lessons from Emerging Markets.” Review of Financial Studies, 20 (2007), 17831831.CrossRefGoogle Scholar
Bekaert, G.; Harvey, C. R.; Lundblad, C.; and Siegel, S.. “What Segments Equity Markets?” Review of Financial Studies, 24 (2011), 38473890.CrossRefGoogle Scholar
Bekaert, G., and Wu, G.. “Asymmetric Volatility and Risks in Equity Markets.” Review of Financial Studies, 13 (2000), 142.CrossRefGoogle Scholar
Bollerslev, T., and Wooldridge, J. M.. “Quasi-Maximum Likelihood Estimation and Inference in Dynamic Models with Time-Varying Covariance.” Economic Review, 11 (1992), 143172.CrossRefGoogle Scholar
Bonser-Neal, C.; Brauer, G.; Neal, R.; and Wheatley, S.. “International Investment Restrictions and Closed-End Country Fund Prices.” Journal of Finance, 45 (1990), 523547.CrossRefGoogle Scholar
Cappiello, L.; Engle, R. F.; and Sheppard, K.. “Asymmetric Dynamics in the Correlations of Global Equity and Bond Returns.” Journal of Financial Econometrics, 4 (2006), 537572.CrossRefGoogle Scholar
Carrieri, F.; Chaieb, I. and Errunza, V.. “Do Implicit Barriers Matter for Globalization?” Review of Financial Studies, 26 (2013), 16941739.CrossRefGoogle Scholar
Carrieri, F.; Errunza, V.; and Hogan, K.. “Characterizing World Market Integration through Time.” Journal of Financial Quantitative Analysis, 42 (2007), 915940.CrossRefGoogle Scholar
Chaieb, I., and Errunza, V.. “International Asset Pricing under Segmentation and PPP Deviations.” Journal of Financial Economics, 86 (2007), 543578.CrossRefGoogle Scholar
Chari, A., and Henry, P. B.. “Risk Sharing and Asset Prices: Evidence from a Natural Experiment.” Journal of Finance, 59 (2004), 12951324.CrossRefGoogle Scholar
De Jong, F., and de Roon, F. A.. “Time-Varying Market Integration and Expected Returns in Emerging Markets.” Journal of Financial Economics, 78 (2005), 583613.CrossRefGoogle Scholar
De Santis, G., and Gerard, B.. “International Asset Pricing and Portfolio Diversification with Time-Varying Risk.” Journal of Finance, 52 (1997), 18811912.CrossRefGoogle Scholar
De Santis, G., and Gerard, B.. “How Big Is the Premium for Currency Risk?” Journal of Financial Economics, 49 (1998), 375412.CrossRefGoogle Scholar
Dreyfus, S. E. Dynamic Programming and the Calculus of Variations. New York, NY: Academic Press (1965).Google Scholar
Dumas, B.; Lewis, K. K.; and Osambela, E.. “Differences of Opinion and International Equity Markets.” Working Paper, INSEAD (2011).
Dumas, B., and Solnik, B.. “The World Price of Foreign Exchange Risk.” Journal of Finance, 50 (1995), 445479.CrossRefGoogle Scholar
Edison, H. J., and Warnock, F. E.. “A Simple Measure of the Intensity of Capital Controls.” Journal of Empirical Finance, 10 (2003), 81103.CrossRefGoogle Scholar
Engle, R. F.“Wald, Likelihood Ratio, and Lagrange Multiplier Tests in Econometrics.” In Handbook of Econometrics, Vol. II, Griliches, Z. and Intriligator, M. D., eds. Amsterdam, The Netherlands: Elsevier Science BV (1984).Google Scholar
Engle, R. F., and Kroner, K. F.. “Multivariate Simultaneous Generalized ARCH.” Econometric Theory, 11 (1995), 122150.CrossRefGoogle Scholar
Engle, R. F., and Ng, V. K.. “Measuring and Testing the Impact of News on Volatility.” Journal of Finance, 5 (1993), 17491778.CrossRefGoogle Scholar
Errunza, V., and Losq, E.. “International Asset Pricing under Mild Segmentation: Theory and Test.” Journal of Finance, 40 (1985), 105124.CrossRefGoogle Scholar
Eun, C. S., and Janakiramanan, S.. “A Model of International Asset Pricing with a Constraint on the Foreign Equity Ownership.” Journal of Finance, 41 (1986), 897914.CrossRefGoogle Scholar
Ferson, W. E., and Harvey, C. R.. “The Variation of Economic Risk Premiums.” Journal of Political Economy, 99 (1991), 385415.CrossRefGoogle Scholar
Ferson, W. E., and Harvey, C. R.. “The Risk and Predictability of International Equity Returns.” Review of Financial Studies, 6 (1993), 527566.CrossRefGoogle Scholar
Fleming, W. H., and Zariphopoulou, T.. “An Optimal Investment/Consumption Model with Borrowing.” Mathematics of Operations Research, 16 (1991), 802822.CrossRefGoogle Scholar
Foerster, S. R., and Karolyi, G. A.. “The Effects of Market Segmentation and Investor Recognition on Asset Prices: Evidence from Foreign Stocks Listing in the United States.” Journal of Finance, 54 (1999), 9811013.CrossRefGoogle Scholar
Harvey, C. R. “The World Price of Covariance Risk.” Journal of Finance, 46 (1991), 111157.CrossRefGoogle Scholar
Henry, P. B.“Stock Market Liberalization, Economic Reform, and Emerging Equity Market Prices.” Journal of Finance, 55 (2000), 529564.CrossRefGoogle Scholar
Hietala, P. “Asset Pricing in Partially Segmented Markets: Evidence from the Finnish Market.” Journal of Finance, 44 (1989), 697718.CrossRefGoogle Scholar
Horn, R. A., and Johnson, C. R.. Topics in Matrix Analysis, 1st ed. Cambridge, UK: Cambridge University Press (1991).CrossRefGoogle Scholar
Hou, K.; Karolyi, G. A.; and Kho, B. C.. “What Factors Drive Global Stock Returns?” Review of Financial Studies, 24 (2011), 25272574.CrossRefGoogle Scholar
Jarque, C., and Bera, A. K.. “Efficient Tests for Normality, Homoscedasticity and Serial Independence of Regression Residuals.” Economics Letters, 6 (1980), 255259.CrossRefGoogle Scholar
Karolyi, G. A., and Wu, Y.. “The Role of Investability Restrictions on Size, Value and Momentum in International Stock Returns.” Working Paper, Cornell University (2012).
Kuhn, H. W., and Tucker, A. W.. “Nonlinear Programming.”Proceedings of the 2nd Berkeley Symposium. Berkeley, CA: University of California Press (1951), 481492.Google Scholar
Lee, K. H. “The World Price of Liquidity Risk.” Journal of Financial Economics, 99 (2011), 136161.CrossRefGoogle Scholar
Ljung, G., and Box, G.. “On a Measure of Lack of Fit in Time Series Models.” Biometrika, 65 (1978), 297303.CrossRefGoogle Scholar
Merton, R. C. “Lifetime Portfolio Selection under Uncertainty: The Continuous-Time Case.” Review of Economic Statistics, 51 (1969), 247257.CrossRefGoogle Scholar
Merton, R. C.“Optimum Consumption and Portfolio Rules in a Continuous-Time Model.” Journal of Economic Theory, 3 (1971), 373413.CrossRefGoogle Scholar
Merton, R. C. “An Intertemporal Capital Asset Pricing Model.” Econometrica, 41 (1973), 867887.CrossRefGoogle Scholar
Solnik, B. “An Equilibrium Model of the International Capital Market.” Journal of Economic Theory, 8 (1974), 500524.CrossRefGoogle Scholar
Solnik, B., and Zuo, L.. “A Global Equilibrium Asset Pricing Model with Home Preference.” Management Science, 58 (2012), 273292.CrossRefGoogle Scholar
Standard & Poor’s. 2012a. “S&P Dow Jones Indices: Float Adjustment Methodology.” S&P Dow Jones Indices: Index Methodology (2012a), (accessed Sept. 10, 2013).
Standard & Poor’s. 2012b. “S&P Global BMI, S&P/IFCI Indices Methodology.” S&P Dow Jones Indices: Index Methodology (2012b), (accessed Sept. 10, 2013).
Stulz, R. M.“A Model of International Asset Pricing.” Journal of Financial Economics, 9 (1981a), 383406.CrossRefGoogle Scholar
Stulz, R. M.“On the Effects of Barriers to International Investment.” Journal of Finance, 36 (1981b), 923934.CrossRefGoogle Scholar
Stulz, R. M.“Globalization, Corporate Finance, and the Cost of Capital.” Journal of Applied Corporate Finance, 12 (1999), 825.CrossRefGoogle Scholar
Szpiro, G. G.“Relative Risk Aversion around the World.” Economic Letters, 20 (1986), 1921.CrossRefGoogle Scholar
Szpiro, G. G., and Outreville, J. F.. “Relative Risk Aversion around the World: Further Results.” Journal of Banking and Finance, 6 (1988), 127128.CrossRefGoogle Scholar
Von Neumann, J., and Morgenstern, O.. The Theory of Games and Economic Behavior, 2nd ed. Princeton, NJ: Princeton University Press (1947).Google Scholar
Zariphopoulou, T. “Consumption-Investment Models with Constraints.” SIAM Journal on Control and Optimization, 32 (1994), 5985.CrossRefGoogle Scholar
Supplementary material: PDF

Errunza and Ta supplementary material S1

Internet Appendix

Download Errunza and Ta supplementary material S1(PDF)
Cited by

Save article to Kindle

To save this article to your Kindle, first ensure is added to your Approved Personal Document E-mail List under your Personal Document Settings on the Manage Your Content and Devices page of your Amazon account. Then enter the ‘name’ part of your Kindle email address below. Find out more about saving to your Kindle.

Note you can select to save to either the or variations. ‘’ emails are free but can only be saved to your device when it is connected to wi-fi. ‘’ emails can be delivered even when you are not connected to wi-fi, but note that service fees apply.

Find out more about the Kindle Personal Document Service.

The Impact of Investability on Asset Valuation
Available formats

Save article to Dropbox

To save this article to your Dropbox account, please select one or more formats and confirm that you agree to abide by our usage policies. If this is the first time you used this feature, you will be asked to authorise Cambridge Core to connect with your Dropbox account. Find out more about saving content to Dropbox.

The Impact of Investability on Asset Valuation
Available formats

Save article to Google Drive

To save this article to your Google Drive account, please select one or more formats and confirm that you agree to abide by our usage policies. If this is the first time you used this feature, you will be asked to authorise Cambridge Core to connect with your Google Drive account. Find out more about saving content to Google Drive.

The Impact of Investability on Asset Valuation
Available formats

Reply to: Submit a response

Please enter your response.

Your details

Please enter a valid email address.

Conflicting interests

Do you have any conflicting interests? *