Foreign Speculators and Emerging Equity Markets


  • Geert Bekaert,

  • Campbell R. Harvey

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    • Bekaert is at Columbia University, Stanford University, and NBER; Harvey is at Duke University and NBER. This research was partially supported by the Davidson Institute at the University of Michigan. Bekaert acknowledges the support of a grant from the National Science Foundation. We have benefited from the comments of Stijn Claessens, Giorgio DeSantis, Bob Hodrick, Shinjun Liu, René Stulz (the editor), and seminar participants at the 1997 Conference on International Financial Markets at Georgia Tech, the International Monetary Fund, the University of Southern California, the University of California at Los Angeles Economics and Finance departments, Columbia University, the University of Limburg, the Stockholm School of Economics, the Swedish School of Economics, Tilburg University, the University of Virginia-Darden, the University of Maryland, the Wharton School, Yale University, Harvard Business School, the University of Miami, Barclays Global Investors in San Francisco, the 1997 European Finance Associate meetings in Vienna, the 1997 Western Finance Association meetings in San Diego, and the 1997 French Finance Association meetings in Grenoble. We have greatly benefited from the referee's comments. We appreciate the excellent research assistance of Rob Feldman, Han Hong, Fan Hu, Angela Ng, and especially Andrew Roper. We are grateful to Darius Miller for providing the ADR announcement dates.


We propose a cross-sectional time-series model to assess the impact of market liberalizations in emerging equity markets on the cost of capital, volatility, beta, and correlation with world market returns. Liberalizations are defined by regulatory changes, the introduction of depositary receipts and country funds, and structural breaks in equity capital flows to the emerging markets. We control for other economic events that might confound the impact of foreign speculators on local equity markets. Across a range of specifications, the cost of capital always decreases after a capital market liberalization with the effect varying between 5 and 75 basis points.