Capital Flow Controls, International Asset Pricing, and Investors' Welfare: A Multi-country Framework.

This paper investigates the impact of capital flow restrictions on the pricing of securities, on the optimal portfolio compositions of investors of different nationalities, and on their welfare. Under capital flow controls, the equilibrium price of a security is determined jointly by its international and national risk premiums, and investors acquire nationality-specific portfolios along with a market-wide proxy for the world market portfolio. Removal of investment barriers generally leads to an increase in the aggregate market value of the affected securities, and all investors favor a move toward market integration. Introduction of different types of index funds in the world market generally increases world market integration and investor welfare. Copyright 1989 by American Finance Association.