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When countries liberalize their stock markets, firms that become eligible for purchase by foreigners (investible), experience an average stock price revaluation of 15.1 percent. Since the covariance of the mean investible firm's stock return with the local market is roughly 200 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 6.8 percentage points, or roughly two fifths 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.

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Paper provided by Stanford University, Graduate School of Business in its series Research Papers with number 1736r.

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Date of creation: Oct 2002
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Handle: RePEc:ecl:stabus:1736r

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• F3 - International Economics - - International Finance
• F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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