Stock Market Liberalizations and the Repricing of Systematic Risk
AFA 2002 Atlanta Meetings; Stanford Business School Working Paper No. 1677
40 Pages Posted: 15 Feb 2001
There are 2 versions of this paper
Stock Market Liberalizations and the Repricing of Systematic Risk
Stock Market Liberalizations and the Repricing of Systematic Risk
Date Written: February 2001
Abstract
When countries open their stock markets to foreign investors, firms that become eligible for purchase by foreigners (investible) are repriced according to the difference in the covariance of their returns with the local and world market. An investible firm whose return covariance with the local market exceeds that with the world market by 0.01 will experience a firm-specific revaluation of 3.4 percent. In contrast, the repricing of firms that remain off limits to foreign investors (non-investible) bears no significant relationship to differences in local and world covariances. These findings suggest that the CAPM has predictive power for the cross-sectional repricing of systematic risk when barriers to capital movements are removed.
Keywords: Stock Market Liberalization, Capital Account Liberalization, Systematic Risk, Capital Asset Pricing Model, Emerging Markets
JEL Classification: F3, F4, G12
Suggested Citation: Suggested Citation
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