Confidence Building in Emerging Stock Markets

53 Pages Posted: 16 Apr 2001

See all articles by Enrico C. Perotti

Enrico C. Perotti

University of Amsterdam - Finance Group; Centre for Economic Policy Research (CEPR)

Luc Laeven

European Central Bank (ECB); Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: December 2001

Abstract

Investor confidence is a necessary condition for the development of emerging markets. Investors recognize that since market-oriented reform policies may be reversed or hindered, they face the risk of ex post policy changes with redistributive impact on investment returns. We argue that a sustained privatization or liberalization program represents a major test of political commitment, and contributes to reduced policy risk. The evidence from our panel study suggests that progress in privatization gradually leads to increased confidence. Moreover, increased confidence has a strong effect on local market development and is a significant determinant of excess returns. We conclude that, just as financial liberalization, the resolution of policy risk resulting from successful privatization has been an important source for the broadening and deepening of emerging stock markets.

Keywords: International financial markets, privatisation, financial liberalization

Suggested Citation

Perotti, Enrico C. and Laeven, Luc A., Confidence Building in Emerging Stock Markets (December 2001). Available at SSRN: https://ssrn.com/abstract=265440 or http://dx.doi.org/10.2139/ssrn.265440

Enrico C. Perotti (Contact Author)

University of Amsterdam - Finance Group ( email )

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Centre for Economic Policy Research (CEPR)

London
United Kingdom

Luc A. Laeven

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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