| This dissertation examines the link between stock market liberalization and the level and the volatility of returns. It is an empirical study of fifteen emerging markets that uses monthly data from December 1984 the earliest to March 2000 the latest.; In the first chapter of the dissertation, we revisit Henry's (2000b) study on stock market liberalization and equity returns addressing the issue of heteroskedasticity across countries. We find a significant increase in returns prior to subsequent and not initial liberalizations. We also compute an average implied revaluation of returns, which we find to be far greater than the total revaluation of returns computed in previous work when only the initial liberalization is significant. A robustness check indicates that our findings are most pronounced for emerging markets in the Latin American region.; In the second chapter, we introduce a measure of liberalization policy, which we call the liberalization index that potentially identifies market opening dates along with the extent of each opening. Using the liberalization index, we re-assess the effect of stock market liberalization on the level of returns prior to market openings. We find that the extent of opening does not matter for return behavior. However, we observe a significant revaluation of returns given the degree of openness at the time of liberalization. Specifically, we find that stock returns rise prior to liberalization as the market becomes more open. This result confirms a key finding from the first chapter that subsequent market openings do matter.; In the third chapter, we examine the effect of liberalization on stock return volatility using an asymmetric GARCH methodology. We construct a long period of liberalization that captures all identified market openings for each emerging market, and study the change in volatility both during and after the liberalization period. We find mixed conclusions that liberalization may lead to decreased, increased, or no significant change in volatility. However, we observe an interesting separation among countries based on post-liberalization volatility estimates. In particular, countries that experienced increased post-liberalization volatility are characterized by lower market transparency, lower investor protection, and higher restrictions in the exit market. |
