Stock Market Liberalization And Emerging Market Country Fund Premiums

Abstract

This paper provides an analysis of the response of prices, net asset values and premiums of U.S. traded emerging market country funds to listing of new funds in the U.S. and relaxation of investment restrictions in their respective countries. The evidence from the panel of 34 country funds from 18 emerging market countries during 1981-1999 shows that listing of new country funds has a significant impact on premiums of existing country funds. There is an eight percent decrease in the premiums on the funds, during the four months beginning the announcement of the new funds, while controlling for other factors which affect fund premiums. Further, this decline is shown to be related to an increase in net asset values rather than a decrease in share prices. The results suggest that new funds are not timed when old funds are trading at large premiums. These findings indicates that country fund premiums reflect barriers to international investments which may be overcome by listing new financial instruments in foreign markets. Relaxation of investment restrictions because of changes in government policy in the country of origin of the funds, however, is shown to result in an increase of both net asset values and share prices and has no net effect on the fund premiums.