Essays on stock markets, policy and growth in emerging markets

The first paper quantifies the importance of industry, country, and firm specific components in international stock returns, by decomposing the variance of individual firm stock returns in 19 developing countries over the period 1976-1992. Using a fixed effects model, the paper finds that industry and country effects are both significant and together explain 35-49% of the total variation of returns. Country effects dominate the explanatory power, while industry effects are small. Country effects don't change through time, while industry effects drop sharply after 1986. The results suggest an important role for international portfolio diversification, a reduced role for technology shocks in international business cycle theory, and a puzzle for the view of the emerging markets' movement toward economic integration since 1986.;The second paper examines the functioning of stock markets following capital control liberalization in 16 emerging market economies and identifies which regulatory and institutional characteristics are associated with well-functioning stock markets. The paper finds that stock markets become larger, more liquid, more integrated internationally, and more volatile following liberalization of restrictions on capital and dividend flows. Also, countries that widely publish comprehensive information about firms have larger, more liquid, more internationally integrated stock markets than countries that do not have these requirements.;The third paper examines whether well-functioning stock markets and banks promote long-run economic growth. Using data on 41 countries from 1976 to 1993, this paper evaluates whether various measures of stock market size, liquidity, and international integration predict future rates of economic growth, capital accumulation, and productivity growth. The paper finds that stock market liquidity robustly predicts economic growth, capital accumulation, and productivity growth over the next 18 years, international integration is positively associated with growth, while stock market size is not strongly linked with future growth.;The paper also finds that measures of stock market liquidity and banking system development together robustly predict future rates of economic growth, capital accumulation, and productivity growth, suggesting that stock markets provide different financial services from banks since liquidity and banking development simultaneously predict growth.