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International Investment Restrictions and closed-End Country Fund Prices
Transcript of International Investment Restrictions and closed-End Country Fund Prices
Invest in a portafolio of assets in a FOREIGN Country and Issues a fix number of shares DOMESTICALLY 2 PRICES 1) Price Quoted Domestic Market
2) Net Asset Value (Determined by the price of underlying shares traded on the FOREIGN market) This paper test Whether announcements of changes in the restrictions are related to changes in the price net-asset value ratios of funds investing in those countries Price Net asset value ratio: Country Funds Price Net asset value The Fund price will increase as much as the marginal domestic investor is willing to pay to avoid these restrictions This paper DO NOT require the use of asset pricing model why???? Because a closed end country fund shares and its underlying asset should have similar risk when capital markets are integrated internationally. Creation of the model 1 - Restrictions loosen
-1 - Increase restrictions
0 - no announcements we test this hyphotesis by regressing premium changes on dummy variables: An announcement of tightened restrictions the premium on the countrys fund L O W E R will An announcement of loosening restrictions R A I S E the premium on the countrys fund
WHAT DOES MAKE THIS MODEL DIFFERENT FROM THE PREVIOUS ONES 1) 2) 3)Doesnt require the use of asset pricing model Regression coefficients
Slightly different from 0- Market integreated
Significantly negative- Market segmentaded Other Models: Black & Stulz - effects of international investment barries take form as taxes. E*fasset > E*Dasset E*fasset= E*dasset + tax same risk Problem: Joint tests of hypothesis market integration and asset pricing model reject the hypothesis when is right because asset pricing model do not hold Eun & Janakiraman - restricted shares & unrestricted shares foreign gob place limits unrestricted shares. when those limits are binding the UnS sell at premium. Problem: measure effectiveness of international barriers hard because investors always find a way. CHINA EXAMPLE AUXILIAR MODEL Explain the tendency of closed end funds investing in US trade at discount Data Friday's close of Busines in New York Closing Price and net asset values for closed end funds Between May 22 1981 and January 12 1986 Approximately synchronous (15 hours lag) The hypotesis may be confunded in 3 ways 1)ambiguous If restrictions change 2) premium fall if restrictions take the form as taxes 3) unrelated changes Adjustment in the events IMF- anual Exchange arrangements and exchange restrictions Capital Controls: 1) Comercial Banks intenational transactions 2)non resident accounts and resident foreign exchange accounts 3)Portafolio Investment 4) Direct Investment Conclusions 1) In 4 out of 5 cases the main hypotesis was empirically confirmed Whenever restrictions where loosened the price net asset value ratio significantly decreased, on average 6.8% Moreover this result was highly significant- 1%level HYPOTESIS:
Announcements of changes in the restrictions are related to changes in the price net-asset value ratios of funds investing in those countries METHODOLOGY pijt= is the change in the jht fund's premium in the week t D1jt= 1 if t is between 2-7 weeks before announcement of loosening of the jth country's investment restrictions. 0 otherwise D2jt= 1 if t is between 1 weeks before and one week after announcement of loosening of the jth country's investment restrictions. 0 otherwise D3jt= 1 if t is between 2-7 weeks after announcement of loosening of the jth country's investment restrictions. 0 otherwise Adjustments exclude observations from following an annoncement that the closed end fund will be open-ended because the discount goes to zero Dividends and capital gains causing unnaturally high variance applied to 71 premium changes Multiple events Not exact date of the event found EVENTS Affecting