Foreign speculators and emerging equity markets

We propose a cross-sectional time-series model to assess the impact of mark et liberalizations in emerging equity markets on the cost of capital, volat ility, 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 emergi ng markets. We control for other economic events that might confound the im pact of foreign speculators on local equity markets. Across a range of spec ifications, the cost of capital always decreases after a capital market lib eralization with the effect varying between 5 and 75 basis points.