Global Versus Local Asset Pricing: A Speculation-Based Test of Market Integration

Harald Hau
2010 Social Science Research Network  
Should capital cost calculations 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
more » ... ck betas. Exploring whether global or local beta changes best explain the cross section of event returns reveals that stocks in developed markets are priced globally and not locally. JEL classification: G11, G14, G15 Abstract Should capital cost calculations 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 that stocks in developed markets are priced globally and not locally.
doi:10.2139/ssrn.1665048 fatcat:rt7ed233yjelxnd7gmycfx5mp4