NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Risk Sharing and Asset Prices: Evidence From a Natural Experiment

Anusha Chari, Peter Blair Henry

NBER Working Paper No. 8988
Issued in June 2002
NBER Program(s):Corporate Finance, International Finance and Macroeconomics

When countries liberalize their stock markets, firms that become eligible for purchase by foreigners (investible), experience an average stock price revaluation of 10.4 percent. Since the covariance of the median investible firm's stock return with the local market is 30 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 3.4 percentage points, or roughly one third 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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Document Object Identifier (DOI): 10.3386/w8988

Published: Chari, Anusha and Peter Blair Henry. "Risk Sharing And Asset Prices: Evidence From A Natural Experiment," Journal of Finance, 2004, v59(3,Jun), 1295-1324. citation courtesy of

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