The degree of financial liberalization and aggregated stock-return volatility in emerging markets

Abstract

a b s t r a c tIn 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.

African Stock Market Performance Dynamics: A Multidimensional Convergence Assessment

“…This results in a lower cost of capital for firms and lower transaction cost for investors (Kim et al, 2005). An integrated financial market has the positive rewards to financial stability as it minimizes the probability of asymmetric shocks (Umutlu et al, 2010). Financial stability in-turn may reduce the risk of crossborder financial contagion (Beine et al, 2010) and improve the capacity of economies to absorb shocks (Yu et al, 2010).…”

“…Specifically, it tests the hypothesis of convergence in 11 different homogenous panels from four dimensions: stock market capitalization, total value traded, turnover and number of listed companies. Findings could have substantial policy implications given the motivations for financial market convergence in the continent: financial theory deems integrated markets to be relatively more efficient in terms of capital allocation compared to divergent ones (Chen et al, 2002); convergence in stock market performance dynamics will stimulate cross-border flow of funds, improve trading volume which will in-turn increase market liquidity; lower cost of capital for firms and lower transaction cost for investors (Kim et al, 2005); financial stability due to minimization of the probability for asymmetric shocks (Umutlu et al, 2010); reduction of the risk of cross-border financial contagion (Beine et al, 2010) and improvement of capacities of economies to absorb shocks (Yu et al, 2010); elimination of the potential for making above normal profits as supernormal profits are arbitraged away and; the possibility of similar yields for financial assets of similar risk and liquidity, regardless of nationality and locality (Von Furstenberg & Jeon, 1989).…”

Large Foreign Ownership and Firm-Level Stock Return Volatility in Emerging Markets

“…In particular, studies that employ the event-study approach (e.g., Bekaert and Harvey (1997), (2000), Kim and Singal (2000), and Henry (2000)) face the problem that liberalization is a gradual process and is often confounded by other parallel domestic economic reforms. Other studies employ indices that measure the openness of an economy to foreign capital inflows and restrictions to foreign equity ownership (e.g., Quinn (1997), Edison and Warnock (2003), Bae et al (2004), and Umutlu et al (2010)). However, such indices only reflect the upper limit rather than the actual extent of foreign investment.…”

The Impact of Foreign Investor Trading Activity on Vietnamese Stock Market

“…Kawakatsu & Morey (1999) illustrate that there is no significant difference in stock market before and after actual liberalization. Umutlu, Akdeniz, & Altay-Salih (2010) show strong evidence to prove that there is negative influence on performance of small and medium markets as well as reducing stock returns. The mechanism of this impact is through aggregated idiosyncratic and local volatility.…”