International asset pricing and investment barriers: evidence from closed-end country funds

Abstract

This paper examines the effect of investment barriers on international asset pricing by looking at the price-net asset value ratio of closed-end country funds. Contrary to conventional beliefs, I find that capital controls (direct barriers) do not necessarily result in premiums in the country fund prices. In fact, in the presence of strong capital controls, significant discounts are not only possible, but also frequent. I show that the premium or discount largely depends on indirect investment barriers, which include economic and political instability, liquidity risk, availability of market information, reliability of accounting standards and investor protection. These results suggest that both direct and indirect barriers have strong effects on international capital market integration.