International Capital Market Integration: Capital can flow freely across national borders where investors can respond to new global information and exploit arbitrage opportunities; the financial asset law of one price applies to assets traded in the internationally/globally integrated capital market.
International Capital Market Segregation: Barriers exist that prevent the market to be as efficient as the integrated capital market.
Capital Mobility Barriers/Impediments
- Psychology: Investors fear the unknown of investing in foreign assets.
- Legal: Governments restrict the flow of foreign capital.
- Transaction Costs: Investment planning and maintenance for assets located abroad often incurs greater cost than similar domestic assets.
- Taxes: Investors may be exposed to high taxation abroad and/or double taxation of an international asset’s return.
- Exchange Rate Risk: Investors need to determine an exchange rate risk premium for the return on a foreign asset.
- Political Risk: Governments can take any number of adverse actions against foreign investors.
Factors Favoring International Capital Market Integration
- International Stock Listing: Some multinational companies have equity shares listed on multiple exchanges; this helps facilitate a law of one price environment for these securities.
- International Banking: Corporations and governments borrow in foreign markets, facilitating the law of one price for a real/inflation adjusted rate of return
- International Investing: Global investors hold assets in many countries; this creates pressure for transparency, liquidity and efficiency for an integrated international market.
