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A Model of International Asset Pricing with a Constraint on the Foreign Equity Ownership

A Model of International Asset Pricing with a Constraint on the Foreign Equity Ownership ABSTRACT This paper derives a closed‐form valuation model in a two‐country world in which the domestic investors are constrained to own at most a fraction, δ, of the number of shares outstanding of the foreign firms. When the “δ constraint” is binding, two different prices rule in the foreign securities market, reflecting the premium offered by the domestic investors over the price under no constraints and the discount demanded by the foreign investors. The premium is shown to be a multiple of the discount, the multiple being the ratio of the aggregate risk aversion of the domestic and foreign investors. Given the aggregate risk‐aversion parameters, the equilibrium premium and discount are determined by the severity of the δ constraint and the “pure” foreign market risk. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Journal of Finance Wiley

A Model of International Asset Pricing with a Constraint on the Foreign Equity Ownership

The Journal of Finance , Volume 41 (4) – Sep 1, 1986

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References (19)

Publisher
Wiley
Copyright
1986 The American Finance Association
ISSN
0022-1082
eISSN
1540-6261
DOI
10.1111/j.1540-6261.1986.tb04555.x
Publisher site
See Article on Publisher Site

Abstract

ABSTRACT This paper derives a closed‐form valuation model in a two‐country world in which the domestic investors are constrained to own at most a fraction, δ, of the number of shares outstanding of the foreign firms. When the “δ constraint” is binding, two different prices rule in the foreign securities market, reflecting the premium offered by the domestic investors over the price under no constraints and the discount demanded by the foreign investors. The premium is shown to be a multiple of the discount, the multiple being the ratio of the aggregate risk aversion of the domestic and foreign investors. Given the aggregate risk‐aversion parameters, the equilibrium premium and discount are determined by the severity of the δ constraint and the “pure” foreign market risk.

Journal

The Journal of FinanceWiley

Published: Sep 1, 1986

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