Stock market liberalization and volatility in the presence of favorable market characteristics and institutions

In this study, we first examine the effect of stock market liberalization on stock return volatility for eighteen emerging markets. Similar to findings from previous work, we find that volatility may decrease, increase, or remain unchanged following liberalization. We then link post-liberalization volatility with market characteristics and quality of institutions, which is the main contribution of the study. Interestingly, countries that experienced lower post-liberalization volatility are in general characterized by favorable market characteristics such as higher market transparency and investor protection, and better quality of institutions such as a higher regard for rule of law and lower levels of corruption.