Trade Opening and the Behavior of Emerging Stock Market Prices

Basu, Parantap; Morey, Matthew R.

doi:2005.20.1.68

Journal of Economic Integration 2005 March;20(1) :68-92.
DOI: https://doi.org/10.11130/jei.2005.20.1.68

Trade Opening and the Behavior of Emerging Stock Market Prices

Parantap Basu, Matthew R. Morey

Fordham University
Pace University

ABSTRACT

In this paper we develop a model that explores the effect of trade openness on stock price behavior. The model predicts that stock returns show non-zero serial correlation in a closed economy. However, once the country opens on the trade front, the stock returns show zero serial correlation. The reason for the difference is that once the country opens itself to trade, the growth process becomes self-sustained due to optimal use of imported intermediate inputs. Stock prices reflect this gain in productive efficiency by displaying a random walk behavior. The model also establishes that financial opening alone without trade opening will not lead to gain in efficiency in the stock prices.

JEL Classification: G12, F41

Keywords: Trade Liberalization | Emerging Stock Markets | Stock Market Efficiency | Trade Openness

REFERENCE

1.	Basu, P., 1990, "A Martingale Theory of Asset Prices in a Production Economy", Mathematical Social Sciences, Vol.20, 1990, pp. 215-225.

2.	Bardhan, P., 1970, Economic Growth, Development and Foreign Trade, Wiley: New York, NY.