The fear of globalizing capital markets |
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| Authors: | E Han Kim Vijay Singal |
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| Institution: | 1. University of Michigan Business School, Ann Arbor, MI 48109-1234, USA;2. Pamplin College of Business, Virginia Tech, Blacksburg, VA 24061-0221, USA;1. Department of Electronics and Radio Engineering, Kyung Hee University, Yongin-si, 446-701 Suwon, Republic of Korea;2. Department of Electrical Engineering, University of Chile, Santiago, Chile;1. School of International Trade and Economics, University of International Business and Economics, No.10 Huixin East Street, Chaoyang District, Beijing, 100029, PR China;2. Stuart School of Business, Illinois Institute of Technology, 565 W Adams St., Chicago, IL 60661, USA;3. Efficient Capital Management, Adjunct Faculty, Illinois Institute of Technology Stuart School of Business and Edhec Business School, 4355 Weaver Parkway, Warrenville, IL 60555, USA;1. Paris School of Economics, University Paris 1, CES, 106 boulevard de l’Hopital, 75013, Paris, France;2. University of La Rochelle (MIA), Avenue Michel Crepeau, 47042, La Rochelle, France;3. University of Leiden, P.O. Box 9512, 2300 RA Leiden, The Netherlands;1. Economic Studies, School of Business, University of Dundee, Dundee, DD1 4HN, UK;2. Centre for Energy, Petroleum and Mineral Law and Policy, University of Dundee, Dundee, DD1 4HN, UK |
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| Abstract: | It is generally accepted that free flow of goods benefits both economies without serious risks. The situation with the free flow of capital is different. Many policy makers and economists are skeptical not only about the benefits of free flow of capital, but also see uncontrolled capital flows as risky and destabilizing. Other economists, however, firmly believe that free capital flows will lead to a more efficient allocation of resources and greater economic growth. Nevertheless, the debate has little empirical evidence to rely on. We hope to fill that gap in this paper. We study the benefits and risks associated with capital flows by examining the experience of emerging economies around the time that foreign investment in stock markets was allowed. We investigate the impact of capital flows on stock returns, stock market efficiency, inflation, and exchange rates. We also examine the effect on different kinds of volatility that might arise as a consequence of capital flows: volatility of stock returns, volatility of inflation rates, and volatility of exchange rates. We find no evidence of an increase in inflation or an appreciation of exchange rates. Stock returns reflect a lower cost of capital after liberalization. There is no increase in stock market volatility and the volatility of inflation and exchange rates actually decreases. Stock markets become more efficient as determined by testing the random walk hypothesis. |
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| Keywords: | Emerging markets Liberalization Capital markets |
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