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Do Implicit Barriers Matter For Globalization?

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Executive Summary

Understanding and measuring the evolution of market integration and its variation across countries is of critical importance. Market liberalization may not result in global pricing or increased market integration if implicit barriers are relevant. The authors use the conditional version of the Errunza and Losq (1985) model to test this proposition, and estimate pricing of investable indices for 22 emerging markets. The results show that local factors are priced and the implicit barriers related to institutional environment, corporate governance and quality of information are significantly associated with the integration measure and hence play a major role in globalization.

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