| Abstract: | A wide array of official capital controls across countries makesit difficult to perform cross-sectional analysis of the effectsof market segmentation. This article constructs a measure ofdeviations from capital market integration that can be consistentlyapplied across countries. It measures the deviations of assetreturns from an equilibrium model of returns constructed assumingmarket integration. Applying the measure to stock returns fromtwenty-four national markets indicates that market segmentationtends to be much larger for emerging markets than for developedmarkets, and that the measure tends to decrease over time. Alongseveral dimensions, the proposed measure yields results thatare consistent with reasonable priors about the relations betweeneffective integration and explicit capital controls, capitalmarket development, and economic growth. |
