Foreign Speculators and Emerging Equity Markets

Duke Univ. Fuqua School of Business WP 9721

56 Pages Posted: 8 May 2000  

Geert Bekaert

Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)

Campbell R. Harvey

Duke University - Fuqua School of Business; National Bureau of Economic Research (NBER); Duke Innovation & Entrepreneurship Initiative

Multiple version iconThere are 2 versions of this paper

Date Written: August 31, 1999

Abstract

A number of countries have delayed the opening of their capital markets to international investment because of reservations about the impact of foreign speculators on both expected returns and market volatility. We propose a cross-sectional time-series model that attempts to assess the impact of market liberalizations, in the form of the offering of depositary receipts, country funds and other financial instruments, in an extranational market, on the cost of capital and market volatility in emerging equity markets. We also examine the impact of capital market liberalizations on the correlation of emerging equity market returns and the world market return. Our empirical approach is designed to control for other economic events which might confound the impact of foreign speculators on local equity markets. Whatever the empirical specification, the cost of capital always decreases after a capital market liberalization with the effect varying between 5 and 90 basis points depending on the specification. There is little impact on volatility. While correlation with world markets increases after liberalizations, it is unlikely that this higher correlation will impact global investors looking to diversify their international portfolios.

Keywords: Equity Market Liberalization, Cost of Capital, Investment Growth, Economic Growth, Liberalization and Risk, Country Correlations, Country Betas, Country Volatility

JEL Classification: F30, F36, G15, G12

Suggested Citation

Bekaert, Geert and Harvey, Campbell R., Foreign Speculators and Emerging Equity Markets (August 31, 1999). Duke Univ. Fuqua School of Business WP 9721. Available at SSRN: https://ssrn.com/abstract=61988 or http://dx.doi.org/10.2139/ssrn.61988

Geert Bekaert

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Campbell R. Harvey (Contact Author)

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States
919-660-7768 (Phone)
919-660-8030 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Duke Innovation & Entrepreneurship Initiative ( email )

215 Morris St., Suite 300
Durham, NC 27701
United States

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