Global versus Local Asset Pricing : A Speculation-Based Test of Market Integration

Should capital cost calculations be based on a global or local market benchmark? The large-scale redefinition of the global MSCI equity index in December 2000 represents a natural experiment to address this important question. It is argued that the MSCI index revision triggered a portfolio shift by index funds which was large enough to modify global and local market benchmarks. The changes in the respective market benchmarks imply distinct and predictable changes to all global and local stock betas. Exploring if global or local beta changes best explain the cross section of world wide equity returns reveals if stocks are priced globally or locally