Foreign Speculators and Emerging Equity Markets

A number of countries have delayed the opening of their capital markets international investment because of reservations about the impact of foreign speculators on both expected returns and volatility. We propose a cross-sectional time-series model that attempts to assess the impact of liberalizations, in the form of the offering of depositary receipts country funds and other financial instruments, in an extranational and volatility in emerging equity markets. We also examine the impact of capital market liberalizations on the correlation of emerging equity returns and the world return. Our empirical approach designed control for other economic events which might confound the impact of foreign speculators on local equity markets. Whatever the empirical specification the cost of capital always decreases after a capital liberalization but the effect is economically and statistically weak. The effects on volatility and correlation are less robust.