External Liberalization of the Korean Securities Market

Abstract

The purpose of this paper is to provide arguments that there

exist traditional forms of benefits associated with forming global

portfolios. This study provides the empirical evidence that

these benefits are generated internally, i.e., strictly from the

traditional diversification of global portfolios alone. Moreover,

our results also establish that domestic interest rate, represented

by risk-free rate of return, is much higher than the

world level. Furthermore, price of risk associated with portfolio

investments in domestic securities has remained far below

the world level, implying that investment behaviors of indigenous

investors are much less risk-averse relative to their counterparts

in the rest of the world. Consequently, our results

show that we must reject the popular belief that domestic

securities are generally undervalued in comparison to foreign

securities, when we account for different risk levels entailed

between domestic and foreign portfolio investments.