This paper examines how the stocks' investability affects the cross-sectional behavior of stock return volatility in emerging markets. We find that the highly investable stocks experienced higher volatility even after controlling for the country, industry, size, and turnover. We show that the highly investable emerging market portfolio is more correlated with the world market, and the non-investable portfolio is less correlated. The volatility of highly investable stocks increases substantially around the 1998 financial crisis, while the volatility of non-investable does not jump as much.

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.