Risk Sharing and Asset Prices: Evidence from a Natural Experiment


  • Anusha Chari,

  • Peter Blair Henry

    Search for more papers by this author
    • Chari is from the University of Michigan Business School. Henry is from the Stanford University Graduate School of Business. Chari acknowledges financial support from the Mitsui Life Financial Research Center at the University of Michigan. Henry acknowledges financial support from an NSF CAREER award, the Hoover Institution, and the Stanford Institute of Economic Policy Research (SIEPR). We are grateful to a very helpful referee, Steve Buser, Rick Green (the editor), Diana Kirk, Rich Lyons, and Paul Romer for extensive comments on earlier drafts. Chad Milner and Begna Gebreyes provided excellent research assistance. We also thank Nick Barberis, Geert Bekaert, John Cochrane, Doug Breeden, Michael Brennan, Judy Chevalier, Brahima Coulibaly, Vihang Errunza, Eugene Fama, Campbell Harvey, Harrison Hong, Lubos Pastor, Jim Poterba, Bill Sharpe, René Stulz, and seminar participants at the AFA, Chicago, Dartmouth, the IMF, Kansas, Michigan, the NBER, North Carolina, Ohio State, Princeton, Rochester, Stanford, Virginia, WFA, and Yale. This paper formerly circulated under the title Stock Market Liberalizations and the Repricing of Systematic Risk. Any remaining errors are our own.


When countries liberalize their stock markets, firms that become eligible for foreign purchase (investible), experience an average stock price revaluation of 15.1%. Since the historical covariance of the average investible firm's stock return with the local market is roughly 200 times larger than its historical covariance with the world market, liberalization reduces the systematic risk associated with holding investible securities. Consistent with this fact: (1) the average effect of the reduction in systematic risk is 6.8 percentage points, or roughly two fifths of the total revaluation; and (2) the firm-specific revaluations are directly proportional to the firm-specific changes in systematic risk.