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Capital Account Liberalization, Risk Sharing and Asset Prices

Author

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  • Chari, Anusha

    (University of Michigan)

  • Peter Blair Henry

    (Stanford University and NBER)

Abstract

In the month that the capital account is liberalized, all publicly traded firms experience a 7 percent stock price revaluation. Firms whose shares become eligible for purchase by foreigners experience and additional revaluation that is directly proportional to their firm specific reduction in aggregate risk -- the covariance of the typical firm's stock return with the local market is on average 30 times larger than its covariance with the world market. The statistical significance of this proportionality persists after controlling for the firm-specific effects of liberalization on expected future profits in this sample of of 411 firms from 11 countries. These findings suggest that capital account liberalization facilitates risk sharing.

Suggested Citation

  • Chari, Anusha & Peter Blair Henry, 2002. "Capital Account Liberalization, Risk Sharing and Asset Prices," Royal Economic Society Annual Conference 2002 44, Royal Economic Society.
    • Handle: RePEc:ecj:ac2002:44
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    Cited by:

    1. Peter Blair Henry & Peter Lombard Lorentzen, 2003. "Domestic Capital Market Reform and Access to Global Finance: Making Markets Work," NBER Working Papers 10064, National Bureau of Economic Research, Inc.
    2. Bekaert, Geert & Harvey, Campbell R. & Lundblad, Christian, 2005. "Does financial liberalization spur growth?," Journal of Financial Economics, Elsevier, vol. 77(1), pages 3-55, July.

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