"International Equity Cross-Listings and Financial Integration"

Abstract

ABSTRACT Foreign stock listing in the US has increased dramatically over the past decade, significantly reducing barriers to foreign investment by domestic residents. These declining barriers have led some to claim that optimal international diversification can be achieved using domestically traded stocks. At the same time, global capital markets appear to be more highly correlated. In this paper, we use the available history of foreign stock returns of companies that list in the United States to analyze whether their asset pricing relationships change over time. For this purpose, we use extend the structural time series break methodology of Perron (1998, 2001) to estimate the cross-sectional breaks in the asset pricing relationships of foreign stocks that list in the US. We then compare these structural asset pricing break estimates with cross-listing dates. While the literature has largely assumed that changes in asset pricing relationships have occurred before or during foreign listings, we find that most occur before stock crosslistings. We also analyze the asset pricing implications of the after cross-listing market, finding an overall increase in betas with respect to the world index after cross-listing. (Also on the agenda, we will use these estimates to calculate the effects of structural changes on welfare gains.

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