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Confidence Building in Emerging Stock Markets

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  • Enrico C. Perotti
  • Luc Laeven
  • Pieter van Oijen

Abstract

Investor confidence is a major determinant of financial integration for emerging markets and their stock prices. We investigate whether privatization also has a significant effect on emerging stock market development through the resolution of policy risk. We argue that a sustained privatization program represents a major test of political commitment to market oriented reforms and to safer private property rights. The evidence suggests that progress in privatization gradually leads to increased confidence as measured by perceived policy risk. Moreover, increased confidence has a strong effect on local market development and excess returns. We conclude that, while liberalization is a necessary condition for market development, the resolution of policy risk resulting from successful privatization has been an important source for the rapid growth of stock markets in emerging economies.

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Bibliographic Info

Paper provided by William Davidson Institute at the University of Michigan in its series William Davidson Institute Working Papers Series with number 366.

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Length: pages
Date of creation: 01 Dec 2000
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Handle: RePEc:wdi:papers:2001-366

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Cited by:
  1. Rodolfo Martell & Rene M. Stulz, 2003. "Equity market liberalizations as country IPOs," NBER Working Papers 9481, National Bureau of Economic Research, Inc.
  2. Perotti, Enrico, 2004. "State ownership - a residual role?," Policy Research Working Paper Series 3407, The World Bank.
  3. Nicola Fuchs-Schündeln & Norbert Funke, 2003. "Stock market liberalizations: Financial and macroeconomic implications," Review of World Economics (Weltwirtschaftliches Archiv), Springer, Springer, vol. 139(4), pages 730-761, December.
  4. Driessen, Joost & Perotti, Enrico, 2011. "Confidence building on Euro convergence: Evidence from currency options," Journal of International Money and Finance, Elsevier, Elsevier, vol. 30(3), pages 474-491, April.
  5. Bekaert, Geert & Harvey, Campbell R., 2003. "Emerging markets finance," Journal of Empirical Finance, Elsevier, Elsevier, vol. 10(1-2), pages 3-56, February.
  6. Vaaler, Paul M. & Schrage, Burkhard N., 2007. "Residual State Factors, Policy Stability and Financial Performance Following Strategic Decisions by Privatizing Telecoms," Working Papers, University of Illinois at Urbana-Champaign, College of Business 07-0102, University of Illinois at Urbana-Champaign, College of Business.
  7. Driessen, Joost & Perotti, Enrico C, 2004. "Confidence Building on Euro Conversion: Theory and Evidence from Currency Options," CEPR Discussion Papers, C.E.P.R. Discussion Papers 4180, C.E.P.R. Discussion Papers.

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