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In this paper we use the structural credit risk methodology of Merton (1974) to estimate country default risk as the country financial risk premium for eight of the largest Latin American economies - Argentina, Bolivia, Brazil, Chile, Colombia, Mexico, Peru and Venezuela - from 1986 to 2000. We test whether and to what extent it affects the amount of foreign direct investment (FDI). We find that the lagged second difference of the financial risk premium is a significant explanatory variable that is robust with respect to the other explanatory variables, including a standard measure of country/political risk, as well as with respect to the individual countries.

In the early 1980's several developing countries introduced liberalisation policies in their economies. One of the reforms they implemented was to develop their stock markets. The theoretical justification for the liberalisation process was provided by the work of McKinnon (1973) and Shaw (1973). Their model follows neo-classical assumptions on savings and investment. Other researchers later completed their model with respect to the stock market, and claimed that its development could benefit the emerging economies [Cho (1986)]. The aim of this thesis is to empirically examine if stock market development in a sample of emerging countries assisted economic growth or not. To examine this, we form three research questions. The first question is: what is the direct impact of stock market development on economic growth in developing countries? The second question refers to the indirect impact of stock market development on the economy via stock price volatility. The question is: has stock market volatility increased following liberalisation policies or not? The third question is: have the emerging stock markets become more integrated with each other and with developed markets following liberalisation? Stock market integration is a result of stock market development so we should expect these stock markets to become more integrated after they were liberalised. In examining these issues, we take into account the special circumstances surrounding each country. To this end we provide an overview of some of the emerging economies we examine and discuss the implications of their individual characteristics for our analysis. We carry out a literature survey which suggests that research in this area has been scarce. The few empirical evidence on these questions are mixed. This thesis aims to contribute to this growing literature by providing additional evidence on the questions we posed and by overcoming some of the problems which are inherent in the methodologies followed by previous researchers who examined these issues.