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Confidence Building in Emerging Stock Markets

Listed author(s):
  • Laeven, Luc
  • Perotti, Enrico C

Investor confidence in reliable property rights and stable, market-oriented policies are a necessary condition for financial integration and the development of emerging stock markets. Announced market-oriented policies may be reversed, however, and are initially not fully credible. We argue that sustained privatization and liberalization programmes represent a major test of political commitment to safer private property rights. We investigate whether successful privatization has a significant effect on emerging stock market development through the resolution of policy risk, i.e. the risk of ex post policy changes with redistributive impact on investment returns. The evidence from our panel study suggests that progress in privatization gradually leads to increased confidence. Moreover, increased confidence has a strong effect on local market development and is a significant determinant of excess returns. We conclude that financial liberalization and the resolution of policy risk resulting from successful privatization has been an important source for the broadening and deepening of emerging stock markets.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3055.

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Date of creation: Nov 2001
Handle: RePEc:cpr:ceprdp:3055
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  1. Geert Bekaert & Campbell R. Harvey, 2000. "Foreign Speculators and Emerging Equity Markets," Journal of Finance, American Finance Association, vol. 55(2), pages 565-613, 04.
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  10. Rafael La Porta & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert W. Vishny, 1998. "Law and Finance," Journal of Political Economy, University of Chicago Press, vol. 106(6), pages 1113-1155, December.
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  12. Geert Bekaert & Campbell R. Harvey, 2000. "Capital Flows and the Behavior of Emerging Market Equity Returns," NBER Chapters, in: Capital Flows and the Emerging Economies: Theory, Evidence, and Controversies, pages 159-194 National Bureau of Economic Research, Inc.
  13. Perotti, Enrico C. & van Oijen, Pieter, 2001. "Privatization, political risk and stock market development in emerging economies," Journal of International Money and Finance, Elsevier, vol. 20(1), pages 43-69, February.
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