Stock Market Liberalization and the Cost of Capital in Emerging Markets

49 Pages Posted: 19 Mar 2009

Date Written: March 19, 2009

Abstract

I study how stock market liberalization changes an emerging market's cost of capital.

I do so in a Lucas economy with two dividend trees. One dividend tree represents the emerging market's dividends while the other tree represents the dividends paid by all other countries. I solve for equilibrium asset prices in two versions of the economy. In the first version, stock markets are partially liberalized, because the emerging market's residents cannot invest in foreign stock markets. All other agents are unconstrained. In the second version, stock markets are fully liberalized, because there are no investment constraints. I show that moving from partial to full liberalization causes an increase in the emerging market's cost of capital and risk premium, despite better international risk sharing.

Keywords: international finance, stock market integration, continuous time, general equilibrium, incomplete markets

JEL Classification: D52, F36, G11, G12, G15

Suggested Citation

Bhamra, Harjoat Singh, Stock Market Liberalization and the Cost of Capital in Emerging Markets (March 19, 2009). Available at SSRN: https://ssrn.com/abstract=1365041 or http://dx.doi.org/10.2139/ssrn.1365041

Harjoat Singh Bhamra (Contact Author)

Imperial College Business School ( email )

Tanaka Building
Exhibition Rd
London, SW7 2AZ
United Kingdom

HOME PAGE: http://www.harjoatbhamra.com

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