WORKING PAPER

Foreign Speculators and Emerging Equity Markets

Campbell R. Harvey
Duke University, Durham, NC 27708
National Bureau of Economic Research, Cambridge, MA 02138

Geert Bekaert
Stanford University, Stanford, CA 94305
National Bureau of Economic Research, Cambridge, MA 02138

Abstract

A number of countries have delayed the opening of their capital markets to international investment because of reservations about the impact of foreign speculators on both expected returns and market volatility. We propose a cross-sectional time-series model that attempts to assess the impact of market liberalizations, in the form of the offering of depositary receipts, country funds and other financial instruments, in an extranational market, on the cost of capital and market volatility in emerging markets. Our empirical approach is designed to control for other economic events which might confound the impact of foreign speculators on local equity markets.