Liquidity and Return Relationships in an Emerging Market

In this paper, we investigate the relationship between liquidity and stock returns in the Vietnam stock market during the global financial crisis. Vietnam is one of a new group of frontier emerging markets referred to as CIVETS (Colombia, Indonesia, Vietnam, Egypt, Turkey, and South Africa). We use a rich and detailed data set of firm characteristics to identify a positive relationship between liquidity and stock returns. This contradicts the negative correlation typically found in stock returns in developed markets. Our results support the proposition that when a market is not fully integrated with the global economy, a lack of liquidity will be a less important risk factor. Our findings contribute to those studies that highlight the diversification benefits from including frontier markets, which have a lower degree of integration with the global economy, in international portfolios.     

Art as an investment: risk, return and portfolio diversification in major painting markets

The present paper examines risk, return and the prospects for portfolio diversification among major painting and financial markets over the period 1976–2001. The art markets examined are Contemporary Masters, French Impressionists, Modern European, 19th Century European, Old Masters, Surrealists, 20th Century English and Modern US paintings. The financial markets comprise US Treasury bills, corporate and government bonds and small and large company stocks. In common with the published literature in this area, the present study finds that the returns on paintings are much lower and the risks much higher than conventional investment markets. Moreover, while low correlations of returns suggest that opportunities for portfolio diversification in art works alone and in conjunction with equity markets exist, the construction of Markowitz mean‐variance efficient portfolios indicates that no diversification gains are provided by art in financial asset portfolios. However, diversification benefits in portfolios comprised solely of art works are possible, with Contemporary Masters, 19th Century European, Old Masters and 20th Century English paintings dominating the efficient frontier during the period in question.     

Financial Integration of Large- and Small-Cap Stocks in Emerging Markets

This study examines the financial integration of large- and small-cap stocks in twenty-three emerging markets to determine their degree of market integration with the world market. The international asset pricing model cannot be rejected for most large-cap stock portfolios, but it is rejected for small-cap stock portfolios. The findings also demonstrate that super-large-cap stocks have the fewest pricing errors and their global financial integration has increased in recent years. In sum, the empirical results indicate that global market integration is primarily associated with the super-large-cap stocks of large emerging markets.     

Harmful diversification: Evidence from alternative investments

Alternative assets have become as important as equities and fixed income in the portfolios of major investors, and so their diversification properties are also important. However, adding five alternative assets (real estate, commodities, hedge funds, emerging markets and private equity) to equity and bond portfolios is shown to be harmful for US investors. We use 19 portfolio models, in conjunction with dummy variable regression, to demonstrate this harm over the 1997–2015 period. This finding is robust to different estimation periods, risk aversion levels, and the use of two regimes. Harmful diversification into alternatives is not primarily due to transactions costs or non-normality, but to estimation risk. This is larger for alternative assets, particularly during the credit crisis which accounts for the harmful diversification of real estate, private equity and emerging markets. Diversification into commodities, and to a lesser extent hedge funds, remains harmful even when the credit crisis is excluded.     

Currency hedging failure in international equity investments and an efficient hedging strategy: The perspective of Korean investors

Korean fund investors suffered significant financial losses from their international equity investments during the recent global financial crisis. Contrary to expectations for improved investment performance, the currency position for hedging purposes worsened performance. In this paper, we critically assess currency-hedging practices for international equity investments from the perspective of Korean investors. We find that international equity portfolios are concentrated in a limited number of emerging market regions; most international equity funds employ near-fixed and near-perfect currency-hedging policies; the minimum-variance currency-hedging strategy performs the best in emerging market regions and its relative gains over the current hedging policy are significant; the no-hedging strategy provides the best performance for the investments into the US and Europe during a turbulent period.     

Contagion in international financial markets: A recursive cointegration approach

This study utilizes the recursive cointegration technique to analyze the dynamic interdependence among ten major equity markets throughout North America, Europe, Latin America and Asia. Results indicate that the international equity markets are integrated and that the degree of integration among these markets has increased over time. A scrutiny of the various crisis periods reveals that a major financial crisis had an effect of increasing the level of convergence among these markets. Moreover, the recursive cointegration technique is able to pinpoint and capture the approximate timing of a major global crisis. In addition, the study finds that the U.S., Japan, India, China, U.K., and Germany lead the other markets with the U.S. contributing most heavily to the common trend. Overall, the results indicate that profitable opportunities from portfolio diversification are limited across major markets and that these benefits are further reduced during episodes that are marked by a global financial turmoil.     

The Global Crisis and Equity Market Contagion

We analyze the transmission of the 2007 to 2009 financial crisis to 415 country‐industry equity portfolios. We use a factor model to predict crisis returns, defining unexplained increases in factor loadings and residual correlations as indicative of contagion. While we find evidence of contagion from the United States and the global financial sector, the effects are small. By contrast, there has been substantial contagion from domestic markets to individual domestic portfolios, with its severity inversely related to the quality of countries’ economic fundamentals. This confirms the “wake‐up call” hypothesis, with markets focusing more on country‐specific characteristics during the crisis.     

Determinants of time varying co-movements among international stock markets during crisis and non-crisis periods

In this paper, we use the DCC MIDAS approach to assess the validity of the wake-up call hypothesis for developed and emerging markets during the global financial crisis (GFC). We use this approach to decompose the total correlations into short- (daily) and long-run (quarterly) correlations for the period from 1999 to 2011. We then examine the transmission mechanisms by regressing the quarterly economic, financial, and behavioral variables on the quarterly DCC–MIDAS correlations. We find that country specific factors are crisis contingent transmission mechanisms for the co-movements of emerging country pairs and mixed pairs of advanced and emerging countries during the global financial crisis. However, we do not observe wake-up calls in the transmission of the crisis among advanced country pairs. The classification of the transmission mechanisms for crisis and non-crisis periods with the different country pairs has important implications for crisis management as well as for portfolio investment strategies. Thus, our findings contribute to the discussion on the role and effectiveness of the international financial architecture.     

Impact of the 2008–2009 financial crisis on the external and internal linkages of European frontier stock markets

This study investigates the impact of the 2008–2009 financial crisis on (i) external linkages of European frontier stock markets (Croatia, Estonia, Romania, Slovakia and Slovenia) with the developed equity markets (the US, the UK, and Germany) and (ii) internal linkages within the frontier markets. The results demonstrate that both long- and short-run external linkages were strengthened during the crisis. The analysis of internal linkages reveals strong relationship only between the Croatian and Slovenian markets. However, the other frontier markets in the group were weakly linked, implying that European frontier stock markets may constitute a good alternative source of diversification benefits during crises periods.     

Global financial crisis and emerging stock market contagion: A multivariate FIAPARCH–DCC approach

This paper empirically investigates the contagion effects of the global financial crisis in a multivariate Fractionally Integrated Asymmetric Power ARCH (FIAPARCH) dynamic conditional correlation (DCC) framework during the period 1997–2012. We focus on five most important emerging equity markets, namely Brazil, Russia, India, China and South Africa (BRICS), as well as USA during different phases of the crisis. The length and the phases of the crisis are identified based on both an economic and a statistical approach. The empirical evidence does not confirm a contagion effect for most BRICS during the early stages of the crisis, indicating signs of isolation or decoupling. However, linkages reemerged (recoupled) after the Lehman Brothers collapse, suggesting a shift on investors' risk appetite. Moreover, correlations among all BRICS and USA are increased from early 2009 onwards, implying that their dependence is larger in bullish than in bearish markets. These findings do not show a pattern of contagion for all BRICSs' markets that could be attributed to their common trade and financial characteristics and provide important implications for international investors and policymakers.     

Industry costs of equity: Evidence from frontier markets

Frontier markets are considered a good destination for international diversification due to their low level of integration with global markets. However, a diversification strategy into frontier markets with respect to country factors does not optimally capture their full diversification potential. Enhancing this strategy by simultaneously incorporating industry factors improves the ability to diversify portfolio risk. We investigate the industry costs of equity in frontier markets using five asset pricing models, taking into account the differences in five regions of frontier markets, namely, Africa, Eastern Europe, the Middle East, Latin America and Caribbean, and Asia. Additionally, we examine how well the explanatory factors of developed and emerging markets can explain industry returns in frontier markets. Our results precisely identified two industries in Africa, and two industries in Eastern Europe that exhibit segmentation from developed markets, and two industries in Africa and one industry in Asia show segmentation from emerging markets. However, we document the limited temporal variation in four regions of frontier markets indicating more precise estimates than US, UK, and European ones. Unlike previous studies, our findings show that the time-varying slopes in frontier markets follow a random-walk process.     

International financial integration in Asian bond markets

With the development of international financial market, the degree of international financial integration increased significantly during the late 1980s and 1990s. A key factor underlying this process was the increased globalization of investments seeking a higher rate of return and the opportunity to diversify risk internationally. In this paper, we investigate the degree of international financial integration in Asia by examining the relationships amongst Asian bond markets by employing the advanced econometric technique of cointegration of error correction vectors. In other words, we propose the answers to the following questions. Firstly, what is the degree of international financial integration in Asian bond markets? Secondly, does this degree of integration significantly change after the 1997 Asian financial crisis?This study has a strong implication for investors, in particular, from the perspective of Australian or US investors, whether they do benefit from investing in Asian bond markets. In addition, understanding the extent of financial integration and monitoring its progress in the region is important for Asian central banks. In addition, increased international financial integration promotes financial development and hence enhances economic performance in the region.     

Returns,Volatilities, and Correlations Across Mature,Regional, and Frontier Markets: Evidence from South Asia

We investigate returns, volatilities, and correlations across mature, dominant regional, and frontier equity markets. Standard & Poor's 500 is chosen as a mature equity market; India is chosen as a dominant regional market; and Bangladesh, Pakistan, and Sri Lanka are chosen as frontier markets. Our empirical tests show that the frontier markets remain fundamentally decoupled from the mature markets during normal market periods. During turbulent times, the contagion effects from the mature to the frontier markets become more pronounced. The results suggest that the dominant regional market plays a key role in disseminating shocks across the frontier markets during normal periods; during the turbulent recent financial crisis period, a similar contagion is not observed.     

On cross-border bank credit and the U.S. financial crisis transmission to equity markets

This paper examines the role played by cross-border equity, bond and bank credit flows versus international trade in the transmission of the U.S. financial crisis to equity markets worldwide. We estimate vector autoregressive models with exogenous global factors using monthly data on 36 emerging and developed countries. The results from an eclectic methodology that includes causality tests, generalized impulse responses and forecast error variance decompositions indicate that the crisis is mostly transmitted through bank credit rather than portfolio flows and international trade. The results are robust to altering the exogenous versus endogenous vectors of variables, to measuring equity prices in U.S. dollars or local currency, to averaging the data across countries versus averaging the parameters from individual country estimation, and to redefining the start date of the crisis. The findings endorse the use of banking regulation and capital controls as part of the policy toolkit to limit financial vulnerability.     

Which market integration measure?

This paper compares the dynamics of the financial integration process as described by different empirical approaches. To this end, a wide range of measures accounting for several dimensions of integration is employed. In addition, we evaluate the performance of each measure by relying on an established international finance result, i.e., increasing financial integration leads to declining international portfolio diversification benefits. Using monthly equity market data for three different country groups (i.e., developed markets, emerging markets, developed plus emerging markets) and a dynamic indicator of international portfolio diversification benefits, we find that (i) all measures give rise to a very similar long-run integration pattern; (ii) the standard correlation explains variations in diversification benefits as well or better than more sophisticated measures. These findings are robust to a battery of robustness checks.     

Economic engagement and within emerging markets integration

We explore the co-movements between emerging markets by employing dynamic conditional correlation approach. We additionally explore the factors that might drive the conditional correlations between emerging markets. We show that trade with the high income countries is a more important driver of the co-movements between emerging markets relative to trade with other emerging markets either within or outside the geographic region of the given country. We further document that the overall health of an economy, investment and market depth explain the correlation between emerging markets. Evidence is also provided that although, the recent emerging markets and global financial crises raised the correlation between emerging markets, not all country pair correlations increased around the period of the crisis. The findings show that economic engagement as opposed to geographic proximity is more relevant in describing within emerging markets integration. The findings suggest that diversification gains could be achieved by strategically investing across some emerging markets even in crisis periods.     

Leverage Constraints and the International Transmission of Shocks

Recent macroeconomic experience has drawn attention to the importance of interdependence among countries through financial markets and institutions, independently of traditional trade linkages. This paper develops a model of the international transmission of shocks due to interdependent portfolio holdings among leverage‐constrained investors. In our model, without leverage constraints on investment, financial integration itself has no implication for international macro comovements. When leverage constraints bind, however, the presence of these constraints in combination with diversified portfolios introduces a powerful financial transmission channel that results in a positive comovement of production, independently of the size of international trade linkages. In addition, the paper shows that with binding leverage constraints, the type of financial integration is critical for international comovement. If international financial markets allow for trade only in noncontingent bonds, but not equities, then the international comovement of shocks is negative. Thus, with leverage constraints, moving from bond trade to equity trade reverses the sign of the international transmission of shocks.     

Linkages between Indian and US financial markets: impact of global financial crisis and Eurozone debt crisis

This paper examines inter-linkages between Indian and US equity, foreign exchange and money markets using the vector autoregressive-multivariate GARCH-BEKK framework. We investigate the impact of global financial crisis (GFC) and Eurozone debt crisis (EZDC) on the conditional volatility and conditional correlation estimates derived from the multivariate GARCH model for Indian and US financial markets. Our results indicate that there is significant bidirectional causality-in-mean between the Indian stock market returns and the Rs./USD market returns, and significant unidirectional causality-in-mean from the US stock market returns to the Indian stock market returns. As regards volatility spillovers, we find that volatility in the Indian stock market rises in response to domestic as well as US financial market shocks but Indian financial market shocks do not impact the US markets. Further, impact of the recent crisis episodes on the covariance matrix is found to be significant. We find that volatility in the Indian and US financial markets significantly amplified during GFC. The conditional correlations across asset markets were significantly accentuated in the wake of the two crisis episodes. The impact of GFC on cross-market conditional correlations is higher for majority of the asset market pairs in comparison to the EZDC.     

Downside risk in Dow Jones Islamic equity indices: Precious metals and portfolio diversification before and after the COVID-19 bear market

Besides great turmoil in financial markets, the COVID-19 pandemic also disrupted the global supply chain, putting the precious metal market into great uncertainty. In this study, we revisit the diversifying role of precious metals – gold, silver, and platinum – for six Dow Jones Islamic (DJI) equity index portfolios using a battery of tests: dynamic conditional correlations (DCCs), four-moment modified value at risk (VaR) and conditional VaR, and global minimum-variance (GMV) portfolio approach. Our empirical results exhibit drastically increased DCCs between sample assets during the COVID period; however, pairing gold with any of the DJI equity indices (except for the Asia-Pacific region) decreases the downside risk of these portfolios. Other precious metals (silver and platinum) do not provide such benefits. Furthermore, we find that a higher allocation of wealth in DJI Japanese equities and gold is required to achieve a GMV portfolio in the post-COVID-19 era, implying higher transaction (hedging) costs to rebalance portfolios (weights) accordingly. Our out-of-sample tests examining the global financial crisis, European debt crisis, and extended sample (2000–2020) periods yield similar findings as gold glitters across all market conditions. Overall, our findings provide notable practical implications for both domestic and international investors.     

Global financial crisis and emerging stock market contagion: A volatility impulse response function approach

By employing the volatility impulse response (VIRF) approach, this paper presents a general framework for addressing the extent of contagion effects between the BRICSs’ and U.S. stock markets and how the BRICSs’ stock markets have been influenced in the context of the 2007–2009 global financial crisis. Our empirical results show during the period of 2007–2009 global financial crisis, there are significant contagion effects from the U.S. to the BRICSs’ stock markets. Yet, the degree of stock market reactions to such shocks differs from one market to another, depending on the level of integration with the international economy. Besides, the strengthened degree of stock market integration among the U.S. and BRICS has adverse effect such that if the 2007–2009 global financial crisis occurs today it may result in heavier impact on stock market volatility nowadays compared to the crisis-era.