| This dissertation considers asset pricing and portfolio holdings in an international economy with foreign ownership and short selling restrictions. The combination of these two restrictions can result in a premium for the shares available to both foreign and domestic investors (Free shares) above the domestic investor-only-shares (Restricted shares). In the final decision period, domestic investors will hold Free shares only if their price is identical to the Restricted share price. However in prior periods, domestic investors are observed holding the more expensive shares, despite the fact that identical dividend distributions and voting rights are obtained with either type of share.In a broader sense, this dissertation addresses not only on international market segmentation issues, but frictional asset pricing in general. Indeed, the short selling restriction breaks down the Euler equation into an inequality, such that asset prices are determined by those investors with the maximum valuation of the asset's payoffs, while the foreign ownership restriction allows the unique opportunity to observe the distinct prices assigned to a given payoff by foreign and domestic investors.This dissertation scrutinizes premiums on Free shares in Sweden for the period 1985-1993, at which time the Swedish government required firms to remove the foreign ownership barrier. These premiums and the corresponding portfolio behaviour of foreign and domestic investors provide support for this model while raising additional questions. Finally, volatility bounds are developed in the presence of short selling restrictions. While these bounds have proven challenging to asset pricing models in the past, the asset pricing model developed in this dissertation cannot be rejected once short selling restrictions are incorporated into the bounds. |
