This paper, authored by Geert Bekaert and Campbell R. Harvey, examines the impact of foreign speculative activity on emerging equity markets. The authors propose a cross-sectional time-series model to assess how market liberalizations, such as the introduction of depository receipts, country funds, and other financial instruments, affect the cost of capital and market volatility in emerging markets. They also explore the impact of these liberalizations on the correlation between emerging equity market returns and the world market return. The study finds that the cost of capital decreases after market liberalizations, but the effect is economically and statistically weak. The effects on volatility and correlation are less robust. The authors use a sophisticated time-series model to estimate conditional volatilities and correlations, and they employ a pooled time-series/cross-sectional analysis to control for other economic events that might confound the impact of foreign speculators. Key findings include: - The introduction of depository receipts (ADRs) and country funds generally reduces the cost of capital. - ADRs and country funds increase local equity market volatility, but the effect is statistically significant only under specific conditions. - The correlation between emerging market returns and the world market increases after liberalizations, but the magnitude of this increase is small and economically insignificant. The paper also discusses the robustness of the results to various specifications and controls, including the impact of the 1995 financial crisis in Mexico. Overall, the findings suggest that while foreign speculative activity can have some effects on emerging markets, the overall impact is limited and may not be economically significant.This paper, authored by Geert Bekaert and Campbell R. Harvey, examines the impact of foreign speculative activity on emerging equity markets. The authors propose a cross-sectional time-series model to assess how market liberalizations, such as the introduction of depository receipts, country funds, and other financial instruments, affect the cost of capital and market volatility in emerging markets. They also explore the impact of these liberalizations on the correlation between emerging equity market returns and the world market return. The study finds that the cost of capital decreases after market liberalizations, but the effect is economically and statistically weak. The effects on volatility and correlation are less robust. The authors use a sophisticated time-series model to estimate conditional volatilities and correlations, and they employ a pooled time-series/cross-sectional analysis to control for other economic events that might confound the impact of foreign speculators. Key findings include: - The introduction of depository receipts (ADRs) and country funds generally reduces the cost of capital. - ADRs and country funds increase local equity market volatility, but the effect is statistically significant only under specific conditions. - The correlation between emerging market returns and the world market increases after liberalizations, but the magnitude of this increase is small and economically insignificant. The paper also discusses the robustness of the results to various specifications and controls, including the impact of the 1995 financial crisis in Mexico. Overall, the findings suggest that while foreign speculative activity can have some effects on emerging markets, the overall impact is limited and may not be economically significant.