IDEAS home Printed from https://ideas.repec.org/p/tiu/tiutis/33c2d6de-346d-4575-bb25-b8950ba97ffd.html
   My bibliography  Save this paper

The Degree of Financial Liberalization and Aggregated Stock-return Volatility in Emerging Markets

Author

Listed:
  • Umutlu, M.
  • Akdeniz, L.
  • Salih, A.A.

Abstract

In this study, we address whether the degree of financial liberalization affects the aggregated total volatility of stock returns by considering the time-varying nature of financial liberalization. We also explore channels through which the degree of financial liberalization impacts aggregated total volatility. We document a negative relation to the degree of financial liberalization after controlling for size, liquidity, country, and crisis effects, especially for small and medium-sized markets. Moreover, the degree of financial liberalization transmits its negative impact on aggregated total volatility through aggregated idiosyncratic and local volatilities. Overall, our results provide evidence in favor of the view that the broadening of the investor base due to the increasing degree of financial liberalization causes a reduction in the total volatility of stock returns.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Umutlu, M. & Akdeniz, L. & Salih, A.A., 2009. "The Degree of Financial Liberalization and Aggregated Stock-return Volatility in Emerging Markets," Other publications TiSEM 33c2d6de-346d-4575-bb25-b, Tilburg University, School of Economics and Management.
    • Handle: RePEc:tiu:tiutis:33c2d6de-346d-4575-bb25-b8950ba97ffd
    as

    Download full text from publisher

    File URL: https://pure.uvt.nl/ws/portalfiles/portal/1111806/2009-67.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Bae, Kee-Hong & Chan, Kalok & Ng, Angela, 2004. "Investibility and return volatility," Journal of Financial Economics, Elsevier, vol. 71(2), pages 239-263, February.
    2. John Y. Campbell & Martin Lettau & Burton G. Malkiel & Yexiao Xu, 2001. "Have Individual Stocks Become More Volatile? An Empirical Exploration of Idiosyncratic Risk," Journal of Finance, American Finance Association, vol. 56(1), pages 1-43, February.
    3. Edison, Hali J. & Warnock, Francis E., 2003. "A simple measure of the intensity of capital controls," Journal of Empirical Finance, Elsevier, vol. 10(1-2), pages 81-103, February.
    4. Kan Li & Randall Morck & Fan Yang & Bernard Yeung, 2004. "Firm-Specific Variation and Openness in Emerging Markets," The Review of Economics and Statistics, MIT Press, vol. 86(3), pages 658-669, August.
    5. Aggarwal, Reena & Inclan, Carla & Leal, Ricardo, 1999. "Volatility in Emerging Stock Markets," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 34(1), pages 33-55, March.
    6. Yexiao Xu & Burton G. Malkiel, 2003. "Investigating the Behavior of Idiosyncratic Volatility," The Journal of Business, University of Chicago Press, vol. 76(4), pages 613-644, October.
    7. Errunza, Vihang & Losq, Etienne, 1985. "International Asset Pricing under Mild Segmentation: Theory and Test," Journal of Finance, American Finance Association, vol. 40(1), pages 105-124, March.
    8. Geert Bekaert & Campbell R. Harvey, 2000. "Foreign Speculators and Emerging Equity Markets," Journal of Finance, American Finance Association, vol. 55(2), pages 565-613, April.
    9. Harvey, Campbell R, 1995. "Predictable Risk and Returns in Emerging Markets," The Review of Financial Studies, Society for Financial Studies, vol. 8(3), pages 773-816.
    10. Bekaert, Geert & Harvey, Campbell R. & Lundblad, Christian, 2005. "Does financial liberalization spur growth?," Journal of Financial Economics, Elsevier, vol. 77(1), pages 3-55, July.
    11. Kwan, Felix B. & Reyes, Mario G., 1997. "Price effects of stock market liberalization in Taiwan," The Quarterly Review of Economics and Finance, Elsevier, vol. 37(2), pages 511-522.
    12. Kim, E Han & Singal, Vijay, 2000. "Erratum [Stock Market Openings: Experience of Emerging Economies]," The Journal of Business, University of Chicago Press, vol. 73(4), October.
    13. Kent Hargis, 2002. "Forms of Foreign Investment Liberalization and Risk in Emerging Stock Markets," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 25(1), pages 19-38, March.
    14. Bekaert, Geert & Harvey, Campbell R., 1997. "Emerging equity market volatility," Journal of Financial Economics, Elsevier, vol. 43(1), pages 29-77, January.
    15. de Jong, Frank & de Roon, Frans A., 2005. "Time-varying market integration and expected returns in emerging markets," Journal of Financial Economics, Elsevier, vol. 78(3), pages 583-613, December.
    16. Merton, Robert C, 1987. "A Simple Model of Capital Market Equilibrium with Incomplete Information," Journal of Finance, American Finance Association, vol. 42(3), pages 483-510, July.
    17. Errunza, Vihang R. & Miller, Darius P., 2000. "Market Segmentation and the Cost of the Capital in International Equity Markets," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 35(4), pages 577-600, December.
    18. Moshirian, Fariborz, 2008. "Globalisation, growth and institutions," Journal of Banking & Finance, Elsevier, vol. 32(4), pages 472-479, April.
    19. De Santis, Giorgio & imrohoroglu, Selahattin, 1997. "Stock returns and volatility in emerging financial markets," Journal of International Money and Finance, Elsevier, vol. 16(4), pages 561-579, August.
    20. Artyom Durnev & Randall Morck & Bernard Yeung & Paul Zarowin, 2003. "Does Greater Firm‐Specific Return Variation Mean More or Less Informed Stock Pricing?," Journal of Accounting Research, Wiley Blackwell, vol. 41(5), pages 797-836, December.
    21. Lane, Philip R. & Milesi-Ferretti, Gian Maria, 2007. "The external wealth of nations mark II: Revised and extended estimates of foreign assets and liabilities, 1970-2004," Journal of International Economics, Elsevier, vol. 73(2), pages 223-250, November.
    22. Edison, Hali J. & Levine, Ross & Ricci, Luca & Slok, Torsten, 2002. "International financial integration and economic growth," Journal of International Money and Finance, Elsevier, vol. 21(6), pages 749-776, November.
    23. Kim, E Han & Singal, Vijay, 2000. "Stock Market Openings: Experience of Emerging Economies," The Journal of Business, University of Chicago Press, vol. 73(1), pages 25-66, January.
    24. Fama, Eugene F & MacBeth, James D, 1973. "Risk, Return, and Equilibrium: Empirical Tests," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 607-636, May-June.
    25. Chan, Kalok & Hameed, Allaudeen, 2006. "Stock price synchronicity and analyst coverage in emerging markets," Journal of Financial Economics, Elsevier, vol. 80(1), pages 115-147, April.
    26. Lau, Sie Ting & Diltz, J. David & Apilado, Vincent P., 1994. "Valuation effects of international stock exchange listings," Journal of Banking & Finance, Elsevier, vol. 18(4), pages 743-755, September.
    27. Ian Domowitz & Jack Glen & Ananth Madhavan, 1998. "International Cross-Listing and Order Flow Migration: Evidence from an Emerging Market," Journal of Finance, American Finance Association, vol. 53(6), pages 2001-2027, December.
    28. Bekaert, Geert & Harvey, Campbell R. & Lundblad, Christian, 2006. "Growth volatility and financial liberalization," Journal of International Money and Finance, Elsevier, vol. 25(3), pages 370-403, April.
    29. Bekaert, Geert & Harvey, Campbell R, 1995. "Time-Varying World Market Integration," Journal of Finance, American Finance Association, vol. 50(2), pages 403-444, June.
    30. Moshirian, Fariborz, 2007. "Globalisation and the role of effective international institutions," Journal of Banking & Finance, Elsevier, vol. 31(6), pages 1579-1593, June.
    31. de la Torre, Augusto & Gozzi, Juan Carlos & Schmukler, Sergio L., 2007. "Stock market development under globalization: Whither the gains from reforms?," Journal of Banking & Finance, Elsevier, vol. 31(6), pages 1731-1754, June.
    32. Wang, Jianxin, 2007. "Foreign equity trading and emerging market volatility: Evidence from Indonesia and Thailand," Journal of Development Economics, Elsevier, vol. 84(2), pages 798-811, November.
    33. Clayton, Jim & MacKinnon, Greg, 2003. "The Relative Importance of Stock, Bond and Real Estate Factors in Explaining REIT Returns," The Journal of Real Estate Finance and Economics, Springer, vol. 27(1), pages 39-60, July.
    34. Holmes, Phil & Wong, Mei Wa, 2001. "Foreign investment, regulation and price volatility in South-east Asian stock markets," Emerging Markets Review, Elsevier, vol. 2(4), pages 371-386, December.
    35. Stephen R. Foerster & G. Andrew Karolyi, 1999. "The Effects of Market Segmentation and Investor Recognition on Asset Prices: Evidence from Foreign Stocks Listing in the United States," Journal of Finance, American Finance Association, vol. 54(3), pages 981-1013, June.
    36. Dvorak, Tomas & Podpiera, Richard, 2006. "European Union enlargement and equity markets in accession countries," Emerging Markets Review, Elsevier, vol. 7(2), pages 129-146, June.
    37. Bekaert, Geert & Harvey, Campbell R., 2002. "Research in emerging markets finance: looking to the future," Emerging Markets Review, Elsevier, vol. 3(4), pages 429-448, December.
    38. Panchenko, Valentyn & Wu, Eliza, 2009. "Time-varying market integration and stock and bond return concordance in emerging markets," Journal of Banking & Finance, Elsevier, vol. 33(6), pages 1014-1021, June.
    39. Henry, Peter Blair, 2000. "Do stock market liberalizations cause investment booms?," Journal of Financial Economics, Elsevier, vol. 58(1-2), pages 301-334.
    40. Peter Blair Henry, 2000. "Stock Market Liberalization, Economic Reform, and Emerging Market Equity Prices," Journal of Finance, American Finance Association, vol. 55(2), pages 529-564, April.
    41. Howe, John S. & Madura, Jeff, 1990. "The impact of international listings on risk : Implications for capital market integration," Journal of Banking & Finance, Elsevier, vol. 14(6), pages 1133-1142, December.
    42. Mehmet Umutlu & Aslihan Altay-Salih, 2010. "Does ADR Listing Affect the Dynamics of Volatility in Emerging Markets?," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 60(2), pages 122-137, May.
    43. Joseph E. Stiglitz, 2004. "Capital-market Liberalization, Globalization, and the IMF," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 20(1), pages 57-71, Spring.
    44. Ferreira, Miguel A. & Gama, Paulo M., 2005. "Have World, Country, and Industry Risks Changed over Time? An Investigation of the Volatility of Developed Stock Markets," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 40(1), pages 195-222, March.
    45. Bae, Kee-Hong & Bailey, Warren & Mao, Connie X., 2006. "Stock market liberalization and the information environment," Journal of International Money and Finance, Elsevier, vol. 25(3), pages 404-428, April.
    46. Lane, Philip & Milesi-Ferretti, Gian Maria, "undated". "External Wealth of Nations," Instructional Stata datasets for econometrics extwealth, Boston College Department of Economics.
    47. Anusha Chari & Peter Blair Henry, 2004. "Risk Sharing and Asset Prices: Evidence from a Natural Experiment," Journal of Finance, American Finance Association, vol. 59(3), pages 1295-1324, June.
    48. Bali, Turan G. & Cakici, Nusret & Levy, Haim, 2008. "A model-independent measure of aggregate idiosyncratic risk," Journal of Empirical Finance, Elsevier, vol. 15(5), pages 878-896, December.
    49. Fernandes, Nuno & Ferreira, Miguel A., 2008. "Does international cross-listing improve the information environment," Journal of Financial Economics, Elsevier, vol. 88(2), pages 216-244, May.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Bley, Jorg & Saad, Mohsen, 2011. "The effect of financial liberalization on stock-return volatility in GCC markets," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 21(5), pages 662-685.
    2. Mehmet Umutlu & Levent Akdeniz & Aslihan Altay-Salih, 2013. "Foreign Equity Trading and Average Stock-return Volatility," The World Economy, Wiley Blackwell, vol. 36(9), pages 1209-1228, September.
    3. 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.
    4. Peter Blair Henry, 2007. "Capital Account Liberalization: Theory, Evidence, and Speculation," Journal of Economic Literature, American Economic Association, vol. 45(4), pages 887-935, December.
    5. Peter Henry, 2007. "Capital Account Liberalization: Theory, Evidence, and Speculation," Discussion Papers 07-004, Stanford Institute for Economic Policy Research.
    6. Li, Donghui & Nguyen, Quang N. & Pham, Peter K. & Wei, Steven X., 2011. "Large Foreign Ownership and Firm-Level Stock Return Volatility in Emerging Markets," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 46(4), pages 1127-1155, August.
    7. Bekaert, Geert & Harvey, Campbell R., 2003. "Emerging markets finance," Journal of Empirical Finance, Elsevier, vol. 10(1-2), pages 3-56, February.
    8. Panchenko, Valentyn & Wu, Eliza, 2009. "Time-varying market integration and stock and bond return concordance in emerging markets," Journal of Banking & Finance, Elsevier, vol. 33(6), pages 1014-1021, June.
    9. de Jong, Frank & de Roon, Frans A., 2005. "Time-varying market integration and expected returns in emerging markets," Journal of Financial Economics, Elsevier, vol. 78(3), pages 583-613, December.
    10. Lucey, Brian M. & Zhang, QiYu, 2011. "Financial integration and emerging markets capital structure," Journal of Banking & Finance, Elsevier, vol. 35(5), pages 1228-1238, May.
    11. Bekaert, Geert & Harvey, Campbell R., 2002. "Research in emerging markets finance: looking to the future," Emerging Markets Review, Elsevier, vol. 3(4), pages 429-448, December.
    12. Kose, M. Ayhan & Prasad, Eswar & Rogoff, Kenneth & Wei, Shang-Jin, 2010. "Financial Globalization and Economic Policies," Handbook of Development Economics, in: Dani Rodrik & Mark Rosenzweig (ed.), Handbook of Development Economics, edition 1, volume 5, chapter 0, pages 4283-4359, Elsevier.
    13. Christoffersen, Peter & Chung, Hyunchul & Errunza, Vihang, 2006. "Size matters: The impact of financial liberalization on individual firms," Journal of International Money and Finance, Elsevier, vol. 25(8), pages 1296-1318, December.
    14. Ali Fayyaz Munir & Shahrin Saaid Shaharuddin & Mohd Edil Abd Sukor & Mohamed Albaity & Izlin Ismail, 2021. "Financial liberalization and the behavior of reversals in emerging market economies," International Journal of Emerging Markets, Emerald Group Publishing Limited, vol. 17(6), pages 1565-1582, January.
    15. Gozzi, Juan Carlos & Levine, Ross & Schmukler, Sergio L., 2008. "Internationalization and the evolution of corporate valuation," Journal of Financial Economics, Elsevier, vol. 88(3), pages 607-632, June.
    16. Fernandes, Nuno, 2009. "Market liberalizations at the firm level: Spillovers fromADRs and implications for local markets," Journal of International Money and Finance, Elsevier, vol. 28(2), pages 293-321, March.
    17. Daehwan Kim & Jung Inn Kim & Taeyoon Sung, 2013. "Stock market liberalization and price response: gradualism versus cold turkey," Applied Economics, Taylor & Francis Journals, vol. 45(3), pages 273-285, January.
    18. Winston Moore, 2014. "Managing The Process Of Removing Capital Controls: What Does The Literature Suggest?," Journal of Economic Surveys, Wiley Blackwell, vol. 28(2), pages 209-237, April.
    19. Jayasuriya, Shamila, 2005. "Stock market liberalization and volatility in the presence of favorable market characteristics and institutions," Emerging Markets Review, Elsevier, vol. 6(2), pages 170-191, June.
    20. Patro, Dilip K. & Wald, John K., 2005. "Firm characteristics and the impact of emerging market liberalizations," Journal of Banking & Finance, Elsevier, vol. 29(7), pages 1671-1695, July.

    More about this item

    JEL classification:

    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:tiu:tiutis:33c2d6de-346d-4575-bb25-b8950ba97ffd. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Richard Broekman (email available below). General contact details of provider: https://www.tilburguniversity.edu/about/schools/economics-and-management/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.