Risk Sharing and Asset Prices: Evidence from a Natural Experiment

Anusha Chari · Peter Blair Henry

344 citations0/0 files storedThe Journal of Finance

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Abstract

ABSTRACT When countries liberalize their stock markets, firms that become eligible for foreign purchase (investible), experience an average stock price revaluation of 15.1%. Since the historical covariance of the average investible firm's stock return with the local market is roughly 200 times larger than its historical covariance with the world market, liberalization reduces the systematic risk associated with holding investible securities. Consistent with this fact: (1) the average effect of the reduction in systematic risk is 6.8 percentage points, or roughly two fifths of the total revaluation; and (2) the firm‐specific revaluations are directly proportional to the firm‐specific changes in systematic risk.

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References

1964CAPITAL ASSET PRICES: A THEORY OF MARKET EQUILIBRIUM UNDER CONDITIONS OF RISK*1991Efficient Capital Markets: II 2000The information content of stock markets: why do emerging markets have synchronous stock price movements?1997Foundations of International Macroeconomics 1991Investor Diversification and International Equity Markets 2017Why Doesn't Capital Flow from Rich to Poor Countries?2000Financial markets and the allocation of capital 2000Foreign Speculators and Emerging Equity Markets

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2020Stock market liberalization and innovation 2008Financial integration, productivity and capital accumulation 2006Financial Globalization 2012Do foreigners facilitate information transmission in emerging markets?2011Assessing Measures of Financial Openness and Integration 2009International Finance and Growth in Developing Countries: What Have We Learned?

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