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Risk Sharing and Asset Prices: Evidence From a Natural Experiment

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  • 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.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 8988.

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Date of creation: Jun 2002
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Publication status: published as Chari, Anusha and Peter Blair Henry. "Risk Sharing And Asset Prices: Evidence From A Natural Experiment," Journal of Finance, 2004, v59(3,Jun), 1295-1324.
Handle: RePEc:nbr:nberwo:8988

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