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Global versus local asset pricing: a speculation-based test of market integration

Author: Hau, Harald INSEAD Area: Finance Series: Working Paper ; 2010/61/FIN Publisher: Fontainebleau : INSEAD, 2010.Language: EnglishDescription: 61 p.Type of document: INSEAD Working Paper Online Access: Click here Abstract: Should capital cost calculation be based on a global or local market benchmark? The December 2000 redefinition of the global MSCI equity index was a natural experiment addressing this question. It is argued that this event triggered a portfolio shift (by index funds) large enough to affect the residual asset supplies constituting the global and local market benchmarks of all actively managed capital. Changes in the market benchmarks imply distinct and predictable changes to global and local stock betas. Exploring whether global or local beta changes best explain the cross section of event returns reveals whether stocks are priced globally or locally.
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Should capital cost calculation be based on a global or local market benchmark? The December 2000 redefinition of the global MSCI equity index was a natural experiment addressing this question. It is argued that this event triggered a portfolio shift (by index funds) large enough to affect the residual asset supplies constituting the global and local market benchmarks of all actively managed capital. Changes in the market benchmarks imply distinct and predictable changes to global and local stock betas. Exploring whether global or local beta changes best explain the cross section of event returns reveals whether stocks are priced globally or locally.

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