Working Paper: NBER ID: w8988
Authors: Anusha Chari; Peter Blair Henry
Abstract: When countries liberalize their stock markets, firms that become eligible for purchase by foreigners (investible), experience an average stock price revaluation of 10.4 percent. Since the covariance of the median investible firm's stock return with the local market is 30 times larger than its covariance with the world market, liberalization reduces the systematic risk associated with holding investible securities. Consistent with this fact: 1) the average effect of the reduction in systematic risk is 3.4 percentage points, or roughly one third of the total effect; and 2) variation in the firm-specific response is directly proportional to the firm-specific change in systematic risk. The statistical significance of this proportionality persists after controlling for changes in expected future profits and index inclusion criteria such as size and liquidity.
Keywords: risk sharing; asset prices; stock market liberalization; natural experiment
JEL Codes: F3; F4; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Stock market liberalization (G18) | Stock price revaluation (G19) |
| Firm-specific covariance structure (C10) | Stock price changes (G19) |
| Reduction in systematic risk (G12) | Stock price revaluation (G19) |