درجه آزادسازی مالی و نوسانات تجمعی بازده سهام در بازارهای نوظهور

In this study, we address whether the degree of financial liberalization affects the aggregated total volatility of stock returns by considering the time-varying nature of financial liberalization. We also explore channels through which the degree of financial liberalization impacts aggregated total volatility. We document a negative relation to the degree of financial liberalization after controlling for size, liquidity, country, and crisis effects, especially for small and medium-sized markets. Moreover, the degree of financial liberalization transmits its negative impact on aggregated total volatility through aggregated idiosyncratic and local volatilities. Overall, our results provide evidence in favor of the view that the broadening of the investor base due to the increasing degree of financial liberalization causes a reduction in the total volatility of stock returns.

Many emerging markets liberalized their capital markets in the last few decades.1 With the removal of restrictions on cross-border transactions, investors participate in emerging markets to take advantage of high returns in these markets and to reduce the risk of their portfolio by international diversification. Financial liberalization provides some advantages for emerging markets, too. It fosters the stock market development (De La Torre et al., 2007), lowers the cost of capital (Bekaert and Harvey, 2000 and Chari and Henry, 2004), which, in turn, leads to investment booms (Henry, 2000) and thus spurs economic growth (Bekaert et al., 2005 and Moshirian, 2008). On the other hand, some researchers share the concern that financial liberalization causes excess volatility in emerging markets (Bae et al., 2004, Li et al., 2004 and Stiglitz, 2004). However, there is no consensus about this view in the literature. For example, De Santis and Imrohoroglu, 1997, Hargis, 2002 and Kim and Singal, 2000 find either a reducing impact or no impact of financial liberalization on volatility. Uncovering the ambiguity in the relationship between financial liberalization and volatility has policy and asset allocation implications. For instance, any possible adverse volatility effects may lead governments to employ restrictive regulatory shifts over foreign equity investments, especially in emerging markets, diminishing the ability of firms to raise capital for profitable projects and thus resulting in poor economic growth. It is also important for financial managers to understand the effects of financial liberalization on the volatility of stock returns since high stock-return volatility can lead to an increase in firms’ cost of capital. Finally, portfolio managers are interested in this particular research question, as they might need to rebalance their portfolios to properly reflect the risk preferences of their investors due to potential changes in the risk profiles of their holdings stemming from changes in the degree of financial liberalization. Most of the previous works assume that financial liberalization occurs at a single point in time and treats it as a one-time event. These studies mainly analyze time-series characteristics of the volatility of local market indexes in the event window around the liberalization date and use alternative event dates for financial liberalization.2 Different liberalization dates may lead different inferences in such studies, which may be one reason why mixed results are obtained in the literature. However, some studies (Bekaert and Harvey, 2002, Bae et al., 2004 and Edison and Warnock, 2003) show that the implementation and speed of financial liberalization varies, depending on the conditions of local markets. Researchers now agree that for many emerging markets, financial liberalization is a process rather than an event and that its intensity and speed changes over time. Another possible problem in the previous literature is the analysis of the return variance of a market portfolio to make inferences about average stock-return variances. This practice may cause erroneous results because a change in the variance of a portfolio may be due to changes in the covariances of the stocks forming the portfolio, without an accompanying change in their variances. In this study, we address whether the degree of financial liberalization affects the aggregated total volatility of stock returns by considering the time-varying nature of financial liberalization. The degree of financial liberalization represents the extent of the removal of restrictions on cross-border transactions through time. By using several continuous measures for the degree of financial liberalization, we not only properly specify the gradual nature of financial liberalization but also eliminate the imprecision problem in dating the liberalization. Our next objective in this study is to determine the channels through which the degree of financial liberalization transmits its impact onto aggregated total volatility. For this purpose, we extend the volatility decomposition of Campbell et al. (2001) in a modified market model framework. Campbell et al. (2001) decompose the aggregated return volatility of stocks by using a methodology that does not require the estimation of covariance or stock beta terms. In our extended model, we model the returns of individual stocks to be driven both by local and global portfolio returns, and thus, we consider the partially segmented/integrated nature of many emerging markets.3 The appealing feature of our extended model is that it accounts for the conditional effect of one factor, given the other. By value weighting the return volatility of stocks in a country, we decompose aggregated total volatility into local, global and idiosyncratic volatility. After this volatility decomposition, we are able to examine through which components of aggregated total volatility is affected. Interestingly, no other study in the literature investigates the mechanisms through which the degree of financial liberalization transmits its impact on aggregated total volatility. Moreover, unlike previous studies that examine the return volatility of a market portfolio, we analyze the aggregated total volatility of stocks. Our aggregated volatility measure is independent of the co-variation in stock returns and therefore, is a pure measure of the average stock-return volatility in a country. We find that the degree of financial liberalization has a negative impact on aggregated total volatility, even after controlling for size, liquidity, country and crisis effects, especially for small and medium-sized markets. We find similar results with binary modeling of financial liberalization and for different time periods. Furthermore, we show that the degree of financial liberalization transmits its reducing impact on aggregated total volatility through aggregated idiosyncratic and local volatilities. This finding is robust to the alternative order of orthogonalization of returns in the volatility decomposition process and to the alternative model-independent definition of idiosyncratic volatility. The documented negative relationship between total volatility and the degree of financial liberalization is consistent with earlier studies suggesting a decrease in volatility due to the investor-base broadening phenomena. A broadened investor base, stemming from the entry of foreign investors during the financial liberalization process, can cause a decrease in total volatility because of an improvement in the market-wide accuracy of public information. The rest of the article is organized as follows: Section 2 discusses the theoretical motives for a possible relationship between the degree of financial liberalization and volatility. This section also introduces the details of the construction and decomposition of aggregated total volatility. Section 3 describes the data and the estimation methodology of aggregated total volatility and its components. Section 4 analyzes the relationship between aggregated total volatility and the degree of financial liberalization; Section 5 extends the analysis to include the volatility components and the final section concludes the study.

In this study, we address the question of whether the degree of financial liberalization affects the aggregated total volatility of stock returns by accounting for the time-varying nature of financial liberalization. Unlike previous studies, we examine the aggregated return volatility of individual stocks rather than the return volatility of the market portfolio. The aggregated return volatility used in this study is a pure measure of the average return volatility of stocks in a country and thus the correlations between the stock returns in a portfolio do not affect our results. We further investigate through which channels the degree of financial liberalization affects aggregated total volatility. The results show that aggregated total volatility is negatively related to the degree of financial liberalization, even after controlling for market development, liquidity, country and crisis effects, especially for small and medium-sized emerging markets. Hence, the increasing degree of financial liberalization has a decreasing impact on aggregated total volatility. The analysis of the components of aggregated total volatility also reveals that the degree of financial liberalization transmits its negative impact on aggregated total volatility through aggregated idiosyncratic and local volatilities. On the other hand, we document a positive relationship between the degree of financial liberalization and global volatility. We obtain similar results with the alternative order of orthogonalization in the volatility decomposition process and with the alternative model-independent definition of idiosyncratic volatility. Our results are consistent with the view that the broadened investor base with foreign investors brought about by financial liberalization improves the accuracy of public information and thus reduces volatility. The findings of this study provide implications for governments’ policies regarding financial liberalization, which affects firms’ abilities to raise capital in order to undertake profitable projects, and to contribute to overall economic growth. In this study we deal with the volatility effects of the degree of financial liberalization, which is proxied by different openness measures to cross-border transactions. Trading activity of foreign investors measured either in the form of equity flows or of trading volume may be a more direct measure of foreign investor participation. Moreover, emerging markets are the markets that attract the attention of home-based individual investors, who are blamed for increasing volatility. Therefore, investigating the volatility effects of trading activity by foreign and individual domestic investors may provide additional insights. We leave these issues for a further study when reliable foreign and domestic trading activity data become available for more emerging markets.