Financial market liberalization and the pricing of idiosyncratic risk

Biqing Huang, John Wald and Rodolfo Martell

Emerging Markets Review, 2013, vol. 17, issue C, 44-59

Abstract: We test the impact of idiosyncratic risk on stock returns for emerging markets that experience financial market liberalizations. Idiosyncratic risk is positively associated with returns prior to financial market liberalization, but liberalization diminishes this effect. Moreover, prior to liberalization, the number (concentration) of stocks available in the market is negatively (positively) correlated with the pricing of idiosyncratic risk. The decrease in the pricing of idiosyncratic risk can explain the reduction in the cost of capital around liberalizations. Additionally, the change in the pricing of idiosyncratic risk may be a useful measure of the success of financial market liberalization.

Keywords: Financial market liberalization; Idiosyncratic risk; Cost of capital; Diversification (search for similar items in EconPapers)
JEL-codes: G15 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ememar:v:17:y:2013:i:c:p:44-59

DOI: 10.1016/j.ememar.2013.08.005

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