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Stock market liberalization and international risk sharing

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  • Iwata, Shigeru
  • Wu, Shu
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Abstract

This paper empirically examines what macroeconomic risks are shared (or not shared) internationally after stock market liberalization in several developing countries. To address this issue, we incorporate an international asset pricing model into a non-linear structural vector autoregression (VAR) system that identifies various sources of macroeconomic risks. We find that most of the risks corresponding to exogenous financial market shocks are surprisingly well shared, although other macroeconomic risks associated with exogenous shocks to output, inflation and monetary policies are not fully shared across countries. Our results suggest that one of the main benefits from stock market liberalization is to allow the countries studied in this paper to better hedge against exogenous and idiosyncratic financial market risks, and stock market liberalization needs to be accompanied by other measures of economic integration in order to achieve the full benefits of international risk sharing.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Financial Markets, Institutions and Money.

Volume (Year): 19 (2009)
Issue (Month): 3 (July)
Pages: 461-476

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Handle: RePEc:eee:intfin:v:19:y:2009:i:3:p:461-476

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Web page: http://www.elsevier.com/locate/intfin

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Keywords: Stock market liberalization Macroeconomic shocks Risk sharing Stochastic discount factor;

References

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Citations

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Cited by:
  1. Arouri, Mohamed El Hedi & Nguyen, Duc Khuong & Pukthuanthong, Kuntara, 2012. "An international CAPM for partially integrated markets: Theory and empirical evidence," Journal of Banking & Finance, Elsevier, vol. 36(9), pages 2473-2493.
  2. Esqueda, Omar A. & Assefa, Tibebe A. & Mollick, André Varella, 2012. "Financial globalization and stock market risk," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 22(1), pages 87-102.
  3. Vithessonthi, Chaiporn & Tongurai, Jittima, 2012. "The impact of capital account liberalization measures," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 22(1), pages 16-34.

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