Emerging markets before the 1997 Asia Pacific financial crisis

This study investigates which Asia Pacific markets were driven by the US stock market and which by the Japanese stock market during the 1995-97 period, right before the 1997 Asia Pacific financial crisis. The results show that stock markets of Hong Kong, Indonesia and Malaysia shared a long-run equilibrium relationship with the US stock market. The stock market of the Philippines was linked with both the US stock market and the Japanese stock market, while stock markets of Thailand and South Korea did not appear to be influenced by either. Countries whose capital markets had a co-integrating relationship with the US market pegged their national currencies closely to the US dollar.     

Volatility spillover and hedging effectiveness among China and emerging Asian Islamic equity indexes

We study the volatility spillover between China and Asian Islamic stock markets. We use a sample of six Islamic MSCI indices from the Asian region, namely China, India, Malaysia, Indonesia, Korea and Thailand obtained from MSCI (Morgan Stanley Capital International). In this paper we analyze the importance of considering spillover effects between emerging Asian Islamic indexes based on the Bivariate VARMA-BEKK-AGARCH model of McAleer et al. (2009), which includes spillover and asymmetric effects. We compute after the effectiveness of portfolio diversification based on the conditional volatility of returns series. Results show a significant positive and negative return spillover from China to selected Asian Islamic stock market and bidirectional volatility spillovers between China, Korea and Thailand Islamic market showing evidence of short-term predictability on Islamic Chinese stock market movements. However there is no short term volatility persistence in India, Indonesia and Malaysia. GARCH results show no persistence in volatility spillover effect in long term from Chinese to Indian, Indonesian and Korean Islamic stock market. Our findings are beneficial for international portfolio diversification for policy makers and investors since the results of portfolio management and hedging effectiveness ratio are different to previous studies.     

Further evidence on Asian stock return behavior

This paper examines the relationship between expected stock returns and size, and market-to-book ratio in five Asian emerging markets: India, Korea, Malaysia, Taiwan and Thailand. Overall, we find a strong size effect in all markets and a significant market-to-book effect in Korea, Malaysia and Thailand. When the tests allow for both variables, the negative relationship between size and average return is less robust; the inclusion of market-to-book equity seems to absorb the role of size in Asian stock returns. Our finding for the Asian market applies to the post-1984 period, thus questioning the assertion of Black [J. Portfolio Manage. 20 (1993) 8] and MacKinlay (1995) that “the value premium is sample-specific”. Although small firms have—to a certain extent—higher average returns than large firms in Asian markets, the market-to-book variable seems to have a consistently stronger role in average returns and would suggest that value stocks have higher average returns than growth stocks. Thus, the higher average return on value stocks in the Asian emerging markets can be considered as a local manifestation of a global phenomenon.     

Dynamic linkage between the Chinese and global stock markets: A normal mixture approach

The paper provides an empirical framework for analyzing the dynamic linkage between Chinese and thirty major stock markets globally. In doing so, we employ the bivariate normal mixture model, a weighted average of two normal distributions that can reveal both the degree and structure of dependence between markets. We show that the level of dependence strengthened since 2004 in general, whereas the contagion effects spread heterogeneously during the global financial crisis. We also examine potential factors that affect the stability of the linkage by capturing regime switching behavior. The results suggest that business cycle synchrony plays a significant role in increasing the instability of dependence between the Chinese and global stock markets, while the impact of asynchrony is negligible. Additionally, we observe increased dependence and unstable structure, associated with the implementation of China's capital market liberalization policies and RMB exchange rate reform.     

Exchange rate regimes, globalisation, and the cost of capital in emerging markets

This paper presents a multifactor asset pricing model for currency, bond, and stock returns for ten emerging markets to investigate the effect of the exchange rate regime on the cost of capital and the integration of emerging financial markets. Our results suggest that a fixed exchange rate regime system can help reduce the cost of capital in emerging markets by reducing the currency risk premia demanded by foreign investors.     

Looking for contagion in currency futures markets

This article tests whether there are pure contagion effects in both conditional means and volatilities among British pound, Canadian dollar, Deutsche mark, and Swiss franc futures markets during the 1992 ERM crisis. A conditional version of international capital asset pricing model (ICAPM) in the absence of purchasing power parity (PPP) is used to control for economic fundamentals. The empirical results indicate that overall there are no mean spillovers among those futures markets, but they are detected during the crisis period. That is, past return shocks originating in any one of the four markets have no impact on the other three markets during the entire sample period, suggesting that these markets are weak‐form efficient. However, this weak‐form market efficiency fails to hold during the market turmoil, especially for British pound and Swiss franc, and the sources of contagion‐in‐mean effects are mainly due to the return shocks originating in three European currency futures markets. As for the contagion‐in‐volatility, it is detected for British pound only because its conditional volatility is influenced by the negative volatility shocks from Canadian dollar, Deutsche mark, and Swiss franc, with Deutsche mark playing the dominant role in generating these shocks. JEL Classifications: C32; F31; G12. © 2003 Wiley Periodicals, Inc. Jrl Fut Mark 23:957–988, 2003     

The impacts of RMB internationalization on onshore and offshore RMB markets

Using the DCC-GARCH model, this study considers distinctive features of China's foreign exchange market to investigate the impacts of RMB internationalization on exchange rates in onshore and offshore markets in different stages during 2010–2017. The results show that policies concerning RMB internationalization, such as interest rate liberalization, exchange rate liberalization, and capital market internationalization, have different impacts on the central parity rate, onshore exchange rate, and offshore exchange rate. In terms of exchange rate liberalization, as the daily trading band was gradually widened in 2012–2015, the onshore exchange rate followed the offshore exchange rate more closely. The central parity rate functioned as a managed floating role. It stabilized onshore and offshore exchange rate fluctuations, while allowing partial marketization. After the exchange rate reform on August 11, 2015, the central parity rate plays a benchmark role based on a more market-oriented price formation mechanism. It makes the central parity rate regain pricing power in onshore and offshore markets. Further, it promotes exchange rate liberalization and RMB internationalization. Nevertheless, with the slowdown of China's economic growth and the narrowing of the interest rate differential between China and the US, the RMB is under pressure to depreciate, and its volatility increases significantly.     

Foreign investors in Taiwan: Their roles and government perspectives

This article describes the financial liberalization process in Taiwan and evaluates the effects of foreign institutional investors on Taiwan's stock market. Gradual liberalization allowed Taiwan to reap the benefits while reducing the harmful impacts of foreign participation during the Asian financial crisis. Overall, the liberalization policies proved to be effective as the stock market has become more stable and efficient. Foreign institutional investors contribute significant growth to the Taiwan stock market, and will continue to play a sizeable role in its future development.     

Financial market liberalization and the pricing of idiosyncratic risk

We test the impact of idiosyncratic risk on stock returns for emerging markets that experience financial market liberalizations. Idiosyncratic risk is positively associated with returns prior to financial market liberalization, but liberalization diminishes this effect. Moreover, prior to liberalization, the number (concentration) of stocks available in the market is negatively (positively) correlated with the pricing of idiosyncratic risk. The decrease in the pricing of idiosyncratic risk can explain the reduction in the cost of capital around liberalizations. Additionally, the change in the pricing of idiosyncratic risk may be a useful measure of the success of financial market liberalization.     

Exchange risk and asset returns: A theoretical and empirical study of an open economy asset pricing model

This study develops a consumption-based asset pricing model in which domestic consumers can buy goods from domestic and foreign markets but can only invest in domestic markets. In this model, the exchange rate influences asset prices through the marginal utility of consumption and increases the risks investors face. We find that our model can successfully price the 25 Fama–French portfolios and industry portfolios in the Chinese market, and the exchange rate is an important pricing factor in the unconditional linear model. We also find that the exchange risk is time-varying and countercyclical, which can help to explain the countercyclicality in equity premium.     

Exchange risk premia and firm characteristics

This paper examines the presence and the determinants of exchange risk premia in stock returns using firm level data from South Korea. We conduct empirical asset pricing tests based on cross-sectional data sorted by firm characteristics such as firm size, liquidity, foreign ownership, and industry. Using alternative model specifications and exchange rate measures, our results support the hypothesis of a significant unconditional exchange risk premium in the Korean stock market at firm and industry levels. More specifically, we find that the exchange risk premium is directly related to firm liquidity and inversely related to firm size and foreign ownership.     

Industry and country factors in emerging market returns: Did the Asian crisis make a difference?

Should investors diversify across emerging stock markets or across industries to achieve improvements in their risk–return tradeoffs especially during financial crisis periods? We examine the issue using individual firm data from a selection of emerging markets and including the period of the 1997 Asian financial crisis. We find that country effects were the dominant force behind the low co-movements among emerging stock market returns. There is evidence of increased industry effects beginning at the time of the Asian financial crisis, but this may have been a temporary phenomenon associated with contagion effects during the crisis.     

Exchange Rate Pass‐through and Currency Invoicing: Implications for Monetary Integration in East Asia

Exporter's price‐setting behaviour and currency invoicing play a key role in the literature on the new open‐economy macroeconomics. This paper estimates exchange rate pass‐through coefficients for the exports of four ASEAN countries: Indonesia, Malaysia, the Philippines and Thailand. In addition, previous estimates of pass‐through as well as invoicing behaviour in East Asia are discussed in the context of regional integration. The new pass‐through coefficients are estimated under two alternate specifications for up to 34 goods for each of the four ASEAN countries destined for up to 13 major markets. The results suggest: (a) little pass‐through is occurring in Southeast Asia and (b) this lack of pass‐through is more likely attributable to the fact that they are small countries in a relatively integrated market, rather than evidence of pricing to market. The implications for regional monetary integration of this apparently low degree of pass‐through are detailed.     

Currency trading and international financial instability

During the past year, global capital markets have experienced an unprecedented series of financial turmoils. Asian contagion, Russia's default and the collapse of the US hedge fund Long Term Capital Management (LTCM) are the low points of this development. As recent events in Latin America and elsewhere indicate, there is no prospect that markets worldwide will lastingly calm down soon. There is an abundance of proposals and suggestions on how the system should be stabilised. The most popular among them include the control of capital flows and hedge-fund activities. The following article draws attention to another element of financial instability which at times triggers, at times fuels, a crisis: expectation-driven foreign exchange transactions.     

External currency pricing and the East Asian crisis

This paper provides a quantitative investigation of the East Asian crisis of 1997-1999. We stress two essential features of the crisis. First, the crisis was a regional phenomenon; the depth and severity of the crisis were exacerbated by a large decline in regional demand. Second, the predominance of the US dollar in the pricing of export goods in Asia (which we document empirically) led to a powerful internal propagation effect of the crisis within the region, contributing greatly to the decline in regional trade flows. We construct a multi-country macroeconomic model which contains these two features and show that it can do a good job in accounting for the response of the main macroeconomic aggregates in Korea, Malaysia and Thailand during the crisis. A key advantage of our model is that it can explain the very slow response of exports to the large real exchange rate depreciations that took place during the crisis. Without the regional dimension and dollar pricing of exports, we find that the model fails to account for the depth and severity of the crisis.     

Modelling spillovers between stock market and FX market: evidence for Nigeria

Abstract

The need to capture the foreign exchange (FX) and stock markets nexus in Nigeria is underscored by the rapidly expanding financial markets integration due to trade and financial liberalization policies which seem to have enhanced the inflow of capital as well as accelerated investment/business interactions. Using variants of the VARMA-AMGARCH model of McAleer, Hoti, and Chan (2009), we find that volatility persistence in the stock market is accentuated by bad news in the market and moderated by good news in the FX market. Finally, we establish that ignoring the asymmetric effects may exaggerate the spillover results.     

Are the East Asian markets integrated? Evidence from the ICAPM

We test a conditional international asset pricing model with both world market and domestic risk included as independent pricing factors for five East Asian markets, the US and World markets. We model second moments and risk exposures using a bi-diagonal multivariate GARCH(1,1) process. We document that this novel GARCH specification provides a significantly better fit of the return process than a standard diagonal specification. Although exposure to world market risk carries a significant premium across all markets, we find little support for the hypothesis that exposure to residual country risk is rewarded. However, residual country returns are significantly related to exchange rate changes. Hence, we find surprisingly little evidence of market segmentation in East Asia over the period 1985–1998.     

Synchronised Business Cycles in East Asia and Fluctuations in the Yen/Dollar Exchange Rate

Because many authors have proposed stimulating the ailing Japanese economy by monetary expansion and yen depreciation, we explore the repercussions of depreciating the yen against the dollar on the other East Asian economies – which largely peg to the dollar. Since 1980, economic integration among Japan's neighbours – China, Hong Kong, Indonesia, Korea, Malaysia, Philippines, Singapore and Thailand – has intensified and (except for China and Singapore) their business cycles have been highly synchronised. These cycles have been closely linked to fluctuations in the yen/dollar exchange rate – through changes in the export competitiveness, inflows of foreign direct investment and intra‐Asian income effects. We show that a major yen devaluation would have a negative impact on incomes in other East Asian economies and that it is not a sensible policy option for Japan.     

The fear of globalizing capital markets

It is generally accepted that free flow of goods benefits both economies without serious risks. The situation with the free flow of capital is different. Many policy makers and economists are skeptical not only about the benefits of free flow of capital, but also see uncontrolled capital flows as risky and destabilizing. Other economists, however, firmly believe that free capital flows will lead to a more efficient allocation of resources and greater economic growth. Nevertheless, the debate has little empirical evidence to rely on. We hope to fill that gap in this paper. We study the benefits and risks associated with capital flows by examining the experience of emerging economies around the time that foreign investment in stock markets was allowed. We investigate the impact of capital flows on stock returns, stock market efficiency, inflation, and exchange rates. We also examine the effect on different kinds of volatility that might arise as a consequence of capital flows: volatility of stock returns, volatility of inflation rates, and volatility of exchange rates. We find no evidence of an increase in inflation or an appreciation of exchange rates. Stock returns reflect a lower cost of capital after liberalization. There is no increase in stock market volatility and the volatility of inflation and exchange rates actually decreases. Stock markets become more efficient as determined by testing the random walk hypothesis.     

Volatility Spillovers and the Risk-Return Relation Between Stock and Foreign Exchange Markets in Brazil

We examine the evidence of mean and volatility spillovers between stock and foreign exchange markets in Brazil with multivariate GARCH models and nonlinear Granger causality tests. We also use a multivariate GARCH-in-mean model to assess the relationship between risk and return in these markets. The results indicate that the stock market leads the foreign exchange market in price formation and that nonlinear Granger causalities from the exchange market to the stock market do occur. Part of these nonlinear causalities are explained by volatility spillovers. We show that exchange rate volatility affects not only stock market volatility but also stock returns.