External Liberalization of the Korean Securities Market: Its Effects on Efficiency and Return Performance

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.