Abstract: Emerging markets literature reveals that capital market liberalisation transforms segmented stock markets into more integrated ones. However further impact should be expected on the dynamics of the rest of the domestic economy and its relation to stock markets. This study presents evidence to that effect. While existing literature emphasises the world integration aspect of the capital market liberalisation through reductions in the cost of equity, this study shows that the significant change after liberalisation was the emergence of world returns as an influential factor on other economic fundamentals. Information content of world returns influenced emerging market returns prior to capital market liberalisation and this relation continued after capital market liberalisation. What is new after liberalisation is the influence of world returns on the dynamics of the domestic economy as a whole and its relation to stock returns
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