Capital Controls and International Capital markets Segmentation: The Evidence from the Japanese and American Stock markets

Mustafa N. Gultekin, Bulent N. Gultekin and Alessandro Penati

Rodney L. White Center for Financial Research Working Papers from Wharton School Rodney L. White Center for Financial Research

Abstract: This paper shows that governments’, rather than individuals’, inhibitions are the only source of segmentation in international capital markets. The paper specifically focuses on two countries, Japan and the U.S., to test the integration of international capital markets. In Japan, the enactment of the Foreign Exchange and Foreign Trade Control Law in December 1980 amounted to a true regime switch that virtually eliminated most capital controls. Using several multifactor asset pricing models we show that the price of risk in the U.S. and Japanese stock markets was different before the liberalization, but not after it. This evidence supports the view that the governments are the only source of international capital markets segmentation.

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