Equity markets

Several years after the beginning of the implementation of liberalisation policies, particularly promoted by the Washington-based global development institutions, there has been increased interaction between emerging equity markets and other equity markets that has heightened volatility transmission and covariation in liquidity risks across markets. However, currency risk, liquidity risk and other asset price- and market-impacting factors still remain, and still provide international investors a platform for diversification. Several of these important factors command a premium which suggests that the costs of external equity capital still face upward pressures, in spite of liberalisation policies implicitly aimed at driving them down. Our attempt to make sense of the evolving body of works in the area suggests that emerging market economies should carefully sequence the implementation of financial policies with, preferably, institutional and legal reforms preceding financial openness and/or that financial openness must be approached wisely in ways that minimise its destabilising effects on the cost of equity (for example, by concurrently provisioning requisite institutional infrastructure that foster efficiency of markets and mitigation of asset price distortion). Furthermore, we conspicuously flag areas needing future research.