The aim of this study is to develop measurement model of price disparity in capital asset pricing. This study examines the effect of the price disparity model on country asset pricing. Output of this research is important to provide understanding that the more integrated of capital market lead the more regular of financial crises. The more regular of financial crises lead the more regular of economy crises. The model is based on Jensen and Meckling (1994) that propose new term postulates called resourceful, evaluator, maximize model (REMM) of the nature of man. In the world without integration, countries develop their economy based on their own resources. The economic growths depend on the effort of humans in exploiting and employing their own resources. Among all resources, human resources are the most fundamental and essential in building competitiveness of nation. REMM relates with explanation that humans care about not only money, but also about almost everything such as respect, honor, power, love, and the welfare of others.

Even the REMM’s term is relatively new, historical evidence of economies in the world have been strongly proved that show how humans use their energy to realize their “dreams” across border of their own resources. Their dream can be neither bounded nor be satisfied by their own resources, rather than they use their energies as much as possible to realize their dream. Their energies and dreams are not static, it grow faster than growth of knowledge, science, culture, and civilization. It involves both physical and non physical activities interaction that creates agreement, alliance, unification, federation, and the interest convergent of others. In the opposite site, its create disagreement, conflicts, refusal, fighting, war, separation, disintegration, and the interest divergent of others.

The theory of invisible hand by Adam Smith in 1776 (Smith, 2007) explained about the body of nations --- representative of the big picture of the nature of man --- will interact among others to acquire assets in achieving the greatest value of their welfare themselves. It will be there auto economy interaction mechanisms that restructure divergent of interests toward new equilibriums. In a closed economy, it is a relatively easier to rearrange the tradeoff between those parties who have divergence or conflict of interests toward a new equilibrium smoothly.

However, economy interaction between the more nations with the more heterogeneity of economies will lead economy volatility and create never ending waves of divergence and conflict of interests. This is another invisible hand mechanism that pushes wider price disparities in the market that engenders one never find price equilibrium. The world will be more regulars in addressing and suffering economy crises. Regarding the REMM postulates, the key point here, the source of crises is not nature of economies itself, rather than the nature of man who has no limit of satisfaction of live, even he has met all desire of demands.

Model of Price Disparity and Hypothesis: Capital market is one of major sources of economy crises. This is the best place for seed of REMM to become inflated bubble. Prices movement in capital market reflects not the past but the future. The current price is the present value of accumulation of future cash flows of firm. Fama (1970) proposes efficient market hypothesis that the current price reflects all information both previous and recent information. Stock price also represents the agreement between seller and buyer that matching bid against asked price. It means they agree there is particular anticipated information that affects the future cash flow of firm.

Intensive interaction among capital markets bring huge information in the markets that makes market participants could not filter anticipated information effectively. It becomes more difficult for market participant to match bid against asked price. The wider disagreement of anticipated information between buyer and seller, the wider divergence of bid and ask prices. Then, the wider spread of bid-ask price will restrain the price toward a new equilibrium. The asset pricing of the country which has strong capital market may related with global capital market and less influence by other factors or noises, while other capital market may susceptible for the noises.

Myers (1977) suggests that equilibrium of firm value (V) consist of the present value of assets already in place (V_AP) and present value of growth opportunities (V_GO) (Myers, 1977), V = V_AP + V_GO [1]_. In the presence of integration in the capital markets, market participants will receive more complex information and then address difficulties to filter anticipated information --- which have valuable information content --- that relevant to predict future cash flow of firm. Hence, the value of V in equation [1] is no longer valid due to inappropriate value measurement of V_GO. Information discrepancy lead market participants make a misvaluation and then it will shift their assessment of growth opportunity from V_GO to V_GO*: V* = V_AP + V_GO* [2]. Where V* is a non optimal present value of firm. Value discrepancy between V and V* represents value of information discrepancy (V_ID) in the capital market, V_ID = V – V* [3]. V_ID is best estimate to measure magnitude of disequilibrium of stock price due to information discrepancy in the capital market. In equation [3], V is the highest value that be asked by part of existing investors, while V* is lower (lowest) value that be asked other parts of existing investors.

In the presence of information discrepancy, market participants have no similar information to assess both V and V*. Each market participant attempts to assess firm value based on their own anticipated information and therefore there will be wider spread of highest-lowest price in the market. Existing stockholders will maintain price at the highest price (V_H), while potential investors attempt to bargain price at the lowest price (V_L), V_ID* = V_H – V_L [4]. Where V_ID* is an estimate value of residual loss due to information discrepancy between market participants, called price disparity. Previous studies used spread of ask-bid price to measure information asymmetry (Lin et al., 2012; Venkatesh & Chiang, 1986) and agency problem (Hermeindito, 2013). There is a quite different between information discrepancy and information asymmetry. Information asymmetry concerns on dissimilarities information that lead different assessment of firm value in the domestic capital market. Information discrepancy concerns on dissimilarities information that lead different assessment of firm value in the integrated capital markets. Hypothesis: the more integrated capital market the more price disparity in country asset pricing model.

This study employed fourteen capital markets that consists of four developed capital market including NYSE (US), FTSE 100 London (UK), NIKKEI 225 Osaka (Japan) ASX (Australia), four capital market that represent BRIC those are BVSP (Brazil) RTS RS (Russia), BNSE SENSEX Bombay (India), and Hang Seng (China), six emerging capital markets that consist of IPC (Mexico), MERV (Argentina), JKSE (Indonesia), KOSPI (South Korea), KLSE (Malaysia), and JSE (South Africa). While the world capital market indices is represented by Morgan Stanley Composite Index All Country World Index (MSCI ACWI). This study used moving accumulated return based on weekly data for 52 weeks from January 1, 2010 to December 31, 2014. Data for this study are collected from finance.yahoo.com and research center of Louis Fed.

The basic capital asset pricing model (CAPM) is: R_j* = α + b_1.1R_W* + e₁ [5], where Rj* and R_W* is return for country capital market indices and return for world capital market minus risk free rate. The proxy of world capital market is MSCI ACWI, while the proxy of risk free rate is 3-month London Interbank Offered Rate (LIBOR) based on U.S Dollar. Regarding equation [4], this study expand the equation [5] as follows: R_j* = α + b_1.2R_W* + b_2.1R_HLW +  b_3.1R_HLj + e₂ [6], where R_HLW and R_HLj is high price return minus low price return for MSCI ACWI and for j capital market. The equation 6 represents price disparity model as expansion model of CAPM. Other noises that relevant with the price disparity model are volatility of the index that can be measured by standard deviation of R_W and R_j. Hence the second expansion model is R_j* = α + b_1.3R_W* + b_2.2R_HLW + b_3.2R_HLj + + b₄SD_RW +  b₅SD_Rj + e₃ [7]. Price disparities based on world index (R_HLW and SD_RW) are designed to examine the effect of integration intention on asset pricing model, while price disparities based on j (domestic factor) index are designed to examine the effect of homemade rebalancing price disparities on asset pricing model.

Research results show that price disparities (both world and domestic price disparities) provide statistically significant contribution to country asset pricing model. The second expansion model of CAPM in equation [7] provides best explanation of asset pricing model. Beside proved by the statistically significant of coefficient of parameters of price disparities, the results also are confirmed by the increasing value of adjusted R² substantially.

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