Impact of capital market internationalization on stock markets: Evidence from the inclusion of China A-shares in the MSCI Emerging Markets Index

Abstract

This paper assesses the short- and long-term market reaction to including A-shares in the Morgan Stanley Capital International Emerging Markets Index. In the short term, the underlying stocks gain cumulative excess returns before and after the announcement date, reflecting a positive signal to the market and presenting a significant index effect. In the long run, including A-shares in the index may improve market quality by influencing stock market synchronization and liquidity and turnover rate. Therefore, we suggest that emerging market countries should actively internationalize their capital markets, introduce foreign investors, increase investor awareness, and improve their capital market structures.