International Stock Markets

What does market integration versus market segmentation mean?

Market segmentation vs. Market integration describes the prevailing scenario in today’s world financial markets where we see that especially equity markets are still segmented, but slight tendencies towards integration can be observed. A global equity market is so far simply not existing, except in a “limited sense” for multinational corporations that can be traded on multiple exchanges (“cross-listing”). Segmentation stems e.g. from the simple risk-aversion principle of investors that would not buy stocks from corporations overseas they know nothing about. Therefore most of the stocks are held locally or in close geographical areas. There is even a trend towards holding stocks from companies from the same state or region. Also there are vast differences in the degree of investor protection offered in various’ countries legislation due to sometimes totally differing legal frameworks. These facts about information asymmetries make up most of the hurdles when it comes to international portfolio investment, which is therefore not yet accomplished due to the above. In addition the different exchanges around the world differ regarding their ways of trading, price-setting or listing requirements like disclosure in differing accounting-rules. In addition one share is not always tradable as such in two or more places. Of course one must at first overcome these shortcomings before we can even think of a global stock exchange market. The overall macroeconomic implications of a global exchange are of course left aside in our analysis.

International trading on different local exchanges gets more complicated in turn. For investors as well as issuing companies it always imposes extra cost to buy stocks in foreign markets or to be listed on multiple exchanges respectively. One contrary example resembling market integration is Euronext by offering a cheaper and more efficient market attracting both, investors and...