Risk Sharing and Asset Prices: Evidence from a Natural Experiment

Abstract

Henry gratefully acknowledges the financial support of an NSF CAREER award and the Stanford Institute of Economic Policy Research (SIEPR). This is a revised version of NBER WP 8265. We thank Geert Bekaert, and Campbell Harvey for extensive comments on previous versions of this paper. We also thank

The impact of capital account liberalization measures

“…Accordingly, we attempt to fill a gap in the current literature by examining the microeconomic effects of a subsequent policy change from capital control to capital account liberalization that occurred in Thailand in 2007. Our paper compliments previous studies that test the effects of initial liberalization policy (in particular the first stock market liberalization) on equity prices of emerging market economies in Latin American and Asia (e.g., Chari and Henry, 2004;Henry, 2000b;Kim and Singal, 2000;Mitton, 2006;Patro and Wald, 2005).…”

“…As the literature on the effects of liberalization policy, specifically capital account liberalization, financial market liberalization and stock market liberalization, on economic growth, performance, efficiency, volatility, and domestic asset prices of emerging market economies has been growing (Chari and Henry, 2004;Edwards, 2001;Grilli and Milesi-Ferretti, 1995;Henry, 2000b;Kim and Singal, 2000;Patro and Wald, 2005;Vithessonthi and Tongurai, 2008), we observe that prior studies are essentially limited to studying the first time liberalization and the results of empirical research are less conclusive. Accordingly, we attempt to fill a gap in the current literature by examining the microeconomic effects of a subsequent policy change from capital control to capital account liberalization that occurred in Thailand in 2007.…”

Stock market liberalization and international risk sharing

“…As a result, these shocks should not have any impact on the difference between the domestic and foreign marginal utility growth, and hence, should not account for much of the volatility of the change in the real exchange rate (the next section explains why this is the case). Consistent with the results in Chari and Henry (2004), we find that most of the risks of exogenous financial market shocks are surprisingly well shared between developed and developing countries after the latter had liberalized their stock markets. However, other macroeconomic risks such as those associated with exogenous shocks to output, inflation and monetary policies appear to be poorly shared across countries in the post-liberalization era.…”

“…At the micro level, for example, Chari and Henry (2004) found that roughly two fifth of the total stock price revaluation following a liberalization is due to the reduction in the systematic risk of investable firms in the liberalizing country. They measured the reduction in the systematic risk by the difference between the historical covariance of a firm's stock return with the local market index and that with the world market index.…”

The effect of financial liberalization on stock-return volatility in GCC markets

“…Free capital mobility leads to more efficient capital allocation and higher risk diversification benefits through risk sharing opportunities which in turn decreases consumption volatility relative to output volatility (Bekaert et al, 2005). Earlier research has shown that the additional benefits attributed to financial liberalization include lower cost of capital (Bekaert and Harvey, 2000;Henry, 2000a;Chari and Henry, 2004), lower volatility (Bekaert and Harvey, 1997;De Santis and Imrohoroglu, 1997;Hargis, 2002;Umutlu et al, 2010a), greater private investment (Henry, 2000b), and higher economic growth (Bekaert et al, 2001;Moshirian, 2007). 3 However, these benefits to financial liberalization do not come without a cost.…”