آزاد سازی بازار سهام و نوسانات درکنار ویژگی های بازار مطلوب و موسسات

In this study, we first examine the effect of stock market liberalization on stock return volatility for eighteen emerging markets. Similar to findings from previous work, we find that volatility may decrease, increase, or remain unchanged following liberalization. We then link post-liberalization volatility with market characteristics and quality of institutions, which is the main contribution of the study. Interestingly, countries that experienced lower post-liberalization volatility are in general characterized by favorable market characteristics such as higher market transparency and investor protection, and better quality of institutions such as a higher regard for rule of law and lower levels of corruption.

Equity market liberalization could have a favorable impact on the economy in many aspects. For instance, several empirical studies have shown that liberalization has had a positive effect on developing economies via the decreased cost of equity, increased returns, and increased private physical investment.1 However, liberalization may make a country susceptible to economic and political turmoil abroad making the domestic markets more volatile. Some would agree that the 1997 East Asian crisis is an example of turmoil in domestic stock markets due partly to equity market liberalization policies. The effect of stock market liberalization on return volatility in particular is an important issue that emerging market economies must consider before their decision to liberalize and perhaps even after. This is because volatility is an unattractive feature that has adverse implications for decisions pertaining to the effective allocation of resources and, therefore, for investment.2 For instance, volatility makes investors more averse to holding stocks due to uncertainty. Investors in turn demand a higher risk premium in order to insure against the increased uncertainty. A greater risk premium results in a higher cost of capital, which then leads to less private physical investment. In addition, greater volatility may increase the value of the ‘option to wait’ thereby delaying investment. Also, weaker regulatory systems in developing markets reduce the efficiency of market signals and the processing of information, which further magnifies the problem of volatility. Why should stock market liberalization affect return volatility? One explanation is that liberalization attracts a new group of investors, mostly institutional investors from already developed markets, whose decisions are based more on rational investment analyses and whose strategies focus on fundamental valuation factors. Hence, the possibility of reduced volatility after liberalization. On the other hand, a market opening may expose the liberalizing country to uncertainties abroad that could be reflected in increased domestic stock price volatility. Therefore, the possibility of increased volatility after liberalization. Also, competing effects may offset each other and liberalization may not have a significant impact on volatility after all. Bekaert and Harvey (1997) point out that a poorly developed stock market in a relatively closed economy is likely to be characterized by high stock market volatility to begin with and liberalizing such a market to foreign investors can only decrease volatility. This is because a fully integrated market is influenced by world factors rather than local factors such as political risk and unstable macroeconomic policies that are prevalent in countries with poorly developed stock markets. Several studies have in fact examined the issue of liberalization and volatility in the stock market and shown empirically that market opening may decrease or increase volatility. See Table 1 for a summary of existing work on liberalization and volatility. We, too, examine stock market liberalization and the volatility of stock returns, which is one of two objectives of the paper. The major contribution of our work lies in the second objective, which is to link post-liberalization volatility with market characteristics and the quality of institutions. The market characteristics that we consider are market transparency, investor protection, and market exit restrictions. The quality of institutions is the risk of repudiation of contracts by the government, the risk of expropriation, corruption, rule of law, and bureaucratic quality. Specifically, we first test whether liberalization has a significant impact on stock return volatility. We then group countries that experienced either a significant decrease or increase in volatility and examine market characteristics and the quality of institutions between the two groups. Our results suggest that lower post-liberalization volatility is associated with better market characteristics and higher quality institutions. Table 1. Summary of existing empirical work on stock market liberalization and stock return volatility Study Type of study Definition of SML Dates of SML Model specification Methodology Results Bekaert and Harvey (2000) Pooled cross-section and time-series study of 20 emerging markets from 1976–1995 using monthly data Regulatory changes, the introduction of depositary receipts and country funds, and structural breaks in net U.S. portfolio flows Major liberalization dates identified by the official liberalization, first sign (first date of official liberalization, ADR, or country fund), or capital flow break point Obtain a time-series of conditional volatilities σi2 for each country using a variant of the GARCH model that also includes other control variables and allows the conditional mean and variance to vary through time Estimate a pooled cross-section and time-series regression of σi2 on four liberalization dummy variables (pre, during, post, and after) and control variables that measure financial and macroeconomic development There is a small but mostly insignificant increase in volatility following liberalizations that becomes negative when control variables are taken into account Kim and Singal (2000) Study of 14 emerging markets for 10 years around each market opening using monthly data Remove restrictions on capital inflows Initial liberalization Obtain residuals from the conditional mean specification of Schwert (1989). Use residuals to obtain conditional volatility estimates, (σi2), using ARCH/GARCH Compare the volatility of post-opening months with the volatility of corresponding months in the pre-liberalization period Volatility in the first 2 years after opening is not significantly different from that before, and in the fourth and fifth years after opening is significantly less than before Levine and Zervos (1998) Individual country study of 16 emerging markets from 1976–1993 using monthly data Liberalize restrictions on international capital flows or on the repatriation of dividends One (in the case of Korea, two) major liberalization dates Schwert (1989) Test for a structural break and a possible significant change in volatility at the date of liberalization using the technique of Perron (1989) Volatility generally tends to be higher in the period after liberalization Bekaert and Harvey (1997) Time-series and cross-sectional study of 17 emerging markets from 1976–1992 using monthly data Capital market reforms Major liberalization dates from Bekaert (1995) Obtain σi2 estimates from the world factor model Estimate a pooled time-series cross-section regression (OLS and GLS) of σi2 on liberalization dummy variables and other explanatory variables SML significantly reduces volatility De Santis and Imrohoroglu (1997) Individual country study of 5 emerging markets from 1988–1996 using weekly data Increase the degree of openness measured by the issuance of share capital The date when the market became fully opened or when the degree of openness notably changed Obtain residuals from the conditional mean equation with an AR(1) term. Use residuals to obtain σi2 using GARCH(1,1) Estimate the model separately for period before and after liberalization and compare mean conditional volatility estimates There is no obvious relationship between SML and volatility Kwan and Reyes (1997) Individual country study of Taiwan from 1988–1994 using weekly data Allow direct investments by foreigners January 1991, when direct investments by foreigners were finally permitted (although under tight restrictions) Obtain residuals from the conditional mean equation with a MA(1) term use residuals to obtain (σi2) estimates using GARCH(1,1) along with a liberalization dummy variable, Dt Check the significance of the estimated coefficient of Dt SML significantly reduces volatility Kim and Singal (1993) Study of 16 emerging markets for 12/24 months around market opening using monthly data Increase the degree of openness measured by the issuance of share capital, and the voting stock open to foreigners Latest liberalization date for the period considered Schwert (1989) standardizes the obtained volatilities and average them relative to market opening across all countries Check significance of the mean volatility for 12/24 months before liberalization with that of 12/24 months after liberalization Volatility is not significantly different after 12 months but is significantly lower after 24 months of opening relative to before Koot and Padmanabhan (1993) Individual country study of Jamaica from 1969–1990 using monthly data Induce participation of new foreign investors through structural programs December 1982, when the privatization and liberalization (PL) program was initiated Obtain residuals from the conditional mean equation with an AR(1) term. Use residuals to obtain σi2 using ARCH/GARCH Estimate the model separately for period before and after liberalization and compare mean conditional volatility estimates Volatility is significantly higher in the period after liberalization Table options The remainder of the paper is organized as follows. Section 2 outlines the estimation method. Section 3 describes the data and presents preliminary statistics for the data. Section 4 discusses the estimation results. And, Section 5 concludes.

One of the main questions we asked in this paper was whether stock market liberalization leads to a significant change in stock volatility. We examined this question empirically using a variant of the GARCH methodology. For the eighteen emerging markets studied, we found evidence that a market opening to foreign investors often decreased or increased stock return volatility. This finding led to the second important question we raised in the study: how do we explain the differences in post-liberalization volatility across countries? In an attempt to answer this question, we compared market characteristics and the quality of institutions between the group of countries that experienced a significant decrease in post-liberalization volatility and the group of countries that experienced a significant increase in post-liberalization volatility. Our results showed that countries experiencing lower post-liberalization volatility are generally characterized by higher quality accounting standards and investor protection laws, and lower restrictions imposed on the repatriation of foreign income and capital. Such countries are also characterized by better quality institutions such as lower levels of corruption. These results do make intuitive sense given that favorable market characteristics and quality institutions are likely to foster more efficient markets where the implementation of liberalization policy is less likely to create undue volatility effects. Given that volatility has adverse implications for domestic private investment, emerging economies that liberalize their markets to foreign investors will benefit by establishing or strengthening favorable market characteristics and a high quality institutional framework that could help decrease post-liberalization volatility.