Question

***This an International Finance Course***

Propose the factors that impact market segmentation in global capital markets.

Your response should be at lest 200 words in length.

Answer 1

Market segmentation is applied both in domestic and international markets. However, for international capital markets, segmentation may be partial or complete and is closely related to the integration of the markets. Various factors affecting market segmentation of capital markets may be political, social, regulatory and customary in nature. Limitation on foreign investment is an important factor. It restricts the flow of investment into a foreign country and may lead to emergence of arbitrage opportunities. However, such opportunities may not be realized on account of higher cost of operating or legal restrictions to carry out trade. Higher cost of operating such trading may wipe out the gain involved and hence may not be carried out by the participants.

There may be regulatory factors as well. The governments may enact laws to control the flow of the funds into their capital markets. This goes to promote segmentations where various capital markets are kept separated. They are not in the position to avail the benefits of integration of international capital markets such as avoidance of arbitrage, better pricing of the securities and general advancement. Such separation is known as equity market segmentation. Currency pricing movements are other important factor behind capital market segmentation.