Abstract
Financial liberalization has been an important component of a wide-ranging economic reform program undertaken by governments of emerging market economies. It is then essential to apprehend its multidimensional aspects for a better understanding of the dynamic behavior of emerging markets over the recent period. The rationale behind this intuition is that financial liberalization concerns a large variety of restrictions which were imposed there.
This chapter aims at reviewing the driving context that shows the necessity of financial liberalization as well as the induced impacts of this reform on the dynamics of emerging stock markets. Precisely, the following topics are particularly discussed: economic rationale for financial liberalization, liberalization methods, dynamics of liberalization process, and economic and financial impacts of liberalization.
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Notes
- 1.
The S&P/IFCI measures the portion of emerging market capitalization that can be theoretically held by foreign investors. Its constituents comprise the most liquid stocks listed in the domestic marketplace where foreign ownership is possible. A dramatic increase in the investable index thus reflects a higher degree of emerging market openings.
- 2.
In addition to the introduction of a free exchange rate regime, all legal limits on foreign investment are abolished. Legal limits regarding type or nature of foreign investment are also suppressed. Capital gains and dividends can now be repatriated freely. There is no need for prior approval of transactions.
- 3.
Note that this analysis does not resort to neither asset pricing models nor event study as they requires the definition of a benchmark pricing model which accurately describes the dynamics of emerging market returns. None of the existing models satisfies however this necessary condition.
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Arouri, M.E.H., Jawadi, F., Nguyen, D.K. (2010). Dynamic Process of Financial Reforms. In: The Dynamics of Emerging Stock Markets. Contributions to Management Science. Physica-Verlag HD. https://doi.org/10.1007/978-3-7908-2389-9_2
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DOI: https://doi.org/10.1007/978-3-7908-2389-9_2
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