Quantitative analysis of privatization

TL;DR

This paper quantitatively examines how privatization impacts market development, risk, and activity, emphasizing the importance of market readiness when introducing new stocks to ensure efficiency and stability.

Contribution

It applies complexity theory to quantify the effects of privatization on market development, activity, risk, and investment horizons, highlighting the importance of market capacity.

Findings

Privatization correlates with reduced political and investment risks.

Introducing new stocks can decrease market efficiency if not aligned with market development.

Market readiness is crucial for successful privatization and market stability.

Abstract

In recent years, the economic policy of privatization, which is defined as the transfer of property or responsibility from public sector to private sector, is one of the global phenomenon that increases use of markets to allocate resources. One important motivation for privatization is to help develop factor and product markets, as well as security markets. Progress in privatization is correlated with improvements in perceived political and investment risk. Many emerging countries have gradually reduced their political risks during the course of sustained privatization. In fact, most risk resolution seems to take place as privatization proceeds to its later stage. Alternative benefits of privatization are improved risk sharing and increased liquidity and activity of the market. One of the main methods to develop privatization is entering a new stock to the markets for arising competition. However, attention to the capability of the markets to accept a new stock is substantial. Without considering the above statement, it is possible to reduce the market's efficiency. In other words, introduction of a new stock to the market usually decreases the stage of development and activity and increases the risk. Based on complexity theory, we quantify how the following factors: stage of development, activity, risk and investment horizons play roles in the privatization.