The degree of financial liberalization and aggregated stock-return volatility in emerging markets

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Umutlu M., Akdeniz L., Salih A.

JOURNAL OF BANKING & FINANCE, vol.34, no.3, pp.509-521, 2010 (SSCI) identifier identifier

  • Publication Type: Article / Article
  • Volume: 34 Issue: 3
  • Publication Date: 2010
  • Doi Number: 10.1016/j.jbankfin.2009.08.010
  • Journal Name: JOURNAL OF BANKING & FINANCE
  • Journal Indexes: Social Sciences Citation Index (SSCI), Scopus
  • Page Numbers: pp.509-521
  • Keywords: Return volatility, Financial liberalization, Market integration, Volatility decomposition, Emerging markets, IDIOSYNCRATIC RISK, ASSET PRICES, GLOBALIZATION, TIME, INTEGRATION, SEGMENTATION, INSTITUTIONS, EQUILIBRIUM, INFORMATION, BEHAVIOR
  • TED University Affiliated: No

Abstract

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. (C) 2009 Elsevier B.V. All rights reserved.