Journal of Financial Economics 71 (2004) 239–263 Investibility and return volatility $ Kee-Hong Bae a , Kalok Chan b, *, Angela Ng b a College of Business Administration, Korea University, Seoul 136-701, South Korea b Department of Finance, Hong Kong University of Science and Technology, Clearwater Bay, Hong Kong, China Received 3 May 2001; received in revised form 25 September 2002 Abstract Unlike previous studies that examine how emerging market return volatility changes subsequent to stock market liberalization, this paper investigates the impact of investibility, or the degree to which a stock can be foreign-owned, on emerging market volatility. We find a positive relation between return volatility and the investibility of individual stocks, even after controlling for country, industry, firm size, and turnover. We also find that a highly investible emerging market portfolio is subject to larger world market exposure than a non-investible portfolio, suggesting that highly investible stocks are more integrated with the world and therefore more vulnerable to world market risk. r 2003 Elsevier B.V. All rights reserved. JEL classification: G15 Keywords: Emerging market; Stock return volatility; Investibility; Market integration 1. Introduction There has been an increase in net portfolio flows into emerging markets in recent years due to the liberalization of these markets. On the one hand, net portfolio flows $ We benefited from comments by Warren Bailey, Han Kim, an anonymous referee, and seminar participants at the Hong Kong University of Science and Technology, Korea University, National University of Singapore, the 2001 European Finance Association Meetings at Barcelona, and the 2002 APFA/PACAP/FMA Meetings at Tokyo. We acknowledge the Earmarked Grants from the Research Grants of Hong Kong (HKUST 6010/00H and HKUST 6063/01H), Wei Lun Senior Fellowship (Chan) and SK Distinguished Research Award (Bae) for financial support. *Corresponding author. Tel.: +852-2358-7680; fax: +852-2358-1749. E-mail address: kachan@ust.hk (K. Chan). 0304-405X/$-see front matter r 2003 Elsevier B.V. All rights reserved. doi:10.1016/S0304-405X(03)00166-1