I understand mathematically why the risk premium for the completely segmented market is higher than the completely integrated market (i.e. the correlation is equal to 1) but can someone explain to me qualitatively why we expect the risk premium to be higher in a completely segmented market?
Hopefully, I am on the right track when I say this (it’s at least how I rationalize it) but in a closed off economy, you’re subject entirely to the risks of your own country, resulting in a higher risk premium reflecting said risks. When you open the doors to trade with other countries, you’re “spreading out” or your risk, reducing the risk premium.
Kind of an extreme example, but North Korea is mainly segmented and most major countries in Europe are integrated…which one would be riskier?