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Financial market liberalization and the pricing of idiosyncratic risk

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  • Huang, Biqing
  • Wald, John
  • Martell, Rodolfo

Abstract

We test the impact of idiosyncratic risk on stock returns for emerging markets that experience financial market liberalizations. Idiosyncratic risk is positively associated with returns prior to financial market liberalization, but liberalization diminishes this effect. Moreover, prior to liberalization, the number (concentration) of stocks available in the market is negatively (positively) correlated with the pricing of idiosyncratic risk. The decrease in the pricing of idiosyncratic risk can explain the reduction in the cost of capital around liberalizations. Additionally, the change in the pricing of idiosyncratic risk may be a useful measure of the success of financial market liberalization.

Suggested Citation

  • Huang, Biqing & Wald, John & Martell, Rodolfo, 2013. "Financial market liberalization and the pricing of idiosyncratic risk," Emerging Markets Review, Elsevier, vol. 17(C), pages 44-59.
    • Handle: RePEc:eee:ememar:v:17:y:2013:i:c:p:44-59
    DOI: 10.1016/j.ememar.2013.08.005
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    More about this item

    Keywords

    Financial market liberalization; Idiosyncratic risk; Cost of capital; Diversification;
    All these keywords.

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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