The Pricing of Country Funds from Emerging Markets: Theory and Evidence

Vihang Errunza, Lemma W. Senbet () and Ked Hogan
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Vihang Errunza: McGill University, Faculty of Management, Montreal, Quebec H3A 1G5, Canada
Lemma W. Senbet: University of Maryland, The Maryland Business School, College Park, MD 20742, USA
Ked Hogan: McGill University, Faculty of Management, Montreal, Quebec H3A 1G5, Canada

International Journal of Theoretical and Applied Finance (IJTAF), 1998, vol. 01, issue 01, 111-143

Abstract: This paper provides a theoretical and empirical analysis of country funds focusing on emerging economies whose capital markets are not readily accessible to outside investors. We study country fund pricing and the associated policy implications under alternative variations of international market structure segmentation. We show that country funds traded in the developed capital markets can be beneficial in promoting the efficiency of pricing in the emerging capital markets and in enhancing capital mobilization by local firms. These efficiency gains vary depending upon the degree to which the emerging market securities are spanned by the core or advanced market securities, and cross-border arbitrage restrictions. A country fund premium or discount arises in our framework owing to access and substitution effects characterizing the relationship between the host and emerging markets. We present some empirical evidence supporting our principal predictions. In particular, we investigate the issues of country fund pricing, relative influences of the home market, the international market, the global closed-end fund factor, and the behavior of fund premia/discounts.

Date: 1998
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DOI: 10.1142/S0219024998000060

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