Stock market liberalization, economic reform, and emerging market equity prices

A stock market liberalization is a decision by a country's government to al low foreigners to purchase shares in that country's stock market. On averag e, a country's aggregate equity price index experiences abnormal returns of 3.3 percent per month in real dollar terms during an eight-month window le ading up to the implementation of its initial stock market liberalization. This result is consistent with the prediction of standard international ass et pricing models that stock market liberalization may reduce the liberaliz ing country's cost of equity capital by allowing for risk sharing between d omestic and foreign agents.