Market Liberalization and Return Volatility: Another View∗

This paper provides a set of empirical tests of the cross-sectional variation of stock volatility and investablility, where investability is defined as the degree to which a stock is accessible to foreigners. Unlike previous studies, which focus on market volatility and market return, we study the relationship between individual stock return volatility and its investablility. Our findings have important implications for the role of foreign investors in emerging markets. Our results show that there is either a negative relationship between investablility and return volatility for individual stocks, or that there is no significant relation between investablility and return volatility. We further confirm it is not foreign funds flows that drive the volatility of emerging market returns, on the contrary, it is the stock volatility that drives the foreign funds flows. JEL subject classifications. E61, F02, F15, F21, F23, F32, F36, F43, G15, G18, K33, O16