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Confidence Building in Emerging Stock Markets

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

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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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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