SIEPR Policy
paper No. 02-004
Risk Sharing and Asset Prices:
Evidence From a Natural Experiment
Peter Blair Henry and Anusha Chari
October 2002
When countries liberalize their stock markets, firms that become eligible for purchase by
foreigners (investible), experience an average stock price revaluation of 15.1 percent.
Since the covariance of the mean investible firm’s stock return with the local market is
roughly 200 times larger than its covariance with the world market, liberalization reduces
the systematic risk associated with holding investible securities. Consistent with this
fact: (1) the average effect of the reduction in systematic risk is 6.8 percentage points, or
roughly two fifths of the total effect; and (2) variation in the firm-specific response is
directly proportional to the firm-specific change in systematic risk. The statistical
significance of this proportionality persists after controlling for changes in expected
future profits and index inclusion criteria such as size and liquidity.
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