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Risk Sharing and Asset Prices: Evidence From a Natural Experiment

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Author Info
Anusha Chari
Peter Blair Henry

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Abstract

When countries liberalize their stock markets, firms that become eligible for purchase by foreigners (investible), experience an average stock price revaluation of 10.4 percent. Since the covariance of the median investible firm's stock return with the local market is 30 times larger than its 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 3.4 percentage points, or roughly one third of the total effect; and 2) variation in the firm-specific response is directly proportional to the firm-specific change in systematic risk. The statistical significance of this proportionality persists after controlling for changes in expected future profits and index inclusion criteria such as size and liquidity.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 8988.

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Date of creation: Jun 2002
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Handle: RePEc:nbr:nberwo:8988

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F3 - International Economics - - International Finance
F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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