Efficiency,Cointegration and Contagion in Equity Markets: Evidence from China,Japan and South Korea*

This paper empirically examines whether three East Asian stock markets, namely, those of China, Japan and South Korea, are individually and/or jointly efficient, and whether contagion exists between the cointegrated markets. While individual market efficiency is examined through testing for the random walk hypothesis, joint market efficiency is examined through testing for cointegration and contagion. The present study finds that the hypothesis of individual market efficiency is strongly rejected for the Chinese stock market, but not for the Japanese and the South Korean stock markets. However, when testing for cointegration, market efficiency is strongly rejected for all these markets. We take a simple case of contagion and find that although there is a long‐term relationship among the three markets, the contagion hypothesis cannot be rejected only between Japanese and South Korean stock markets, indicating short‐run portfolio diversification benefits from these two markets.     

MACROECONOMIC UNCERTAINTY AND CONDITIONAL STOCK MARKET VOLATILITY IN SOUTH AFRICA*

This paper analyses how systematic risk emanating from the macroeconomy is transmitted into stock market volatility using augmented autoregressive Generalised Autoregressive Conditional Heteroscedastic (AR‐GARCH) and vector autoregression (VAR) models. Also examined is whether the relationship between the two is bidirectional. By imposing dummies for the 1997‐1998 Asian and the 2007‐2009 sub‐prime financial crises, the study further analyses whether financial crises affect the relationship between macroeconomic uncertainty and stock market volatility. The findings show that macroeconomic uncertainty significantly influences stock market volatility. Although volatilities in inflation, the gold price and the oil price seem to play a role, it is found that volatility in short‐term interest rates and exchange rates are the most important, suggesting that South African domestic financial markets are increasingly becoming interdependent. Finally, the results show that financial crises increase volatility in the stock market and in most macroeconomic variables, and, by so doing, strengthen the effects of changes in macroeconomic variables on the stock market.     

金融中介、股票市场与经济增长:基于联立方程模型的实证分析

文章利用1998～2009年的季度数据,通过构建联立方程模型,利用GMM估计方法系统考察了中国金融中介、股票市场与经济增长之间的相互关系.实证研究结果表明:金融中介发展与经济增长二者相互影响,但作用方向不同:金融中介的总体规模对经济发展的影响为负;经济增长对于金融中介的发展存在显著的正向作用;股票市场发展与经济增长二者...     

REGIONAL INTEGRATION OF EQUITY MARKETS IN SUB-SAHARAN AFRICA

Equity markets in developing and emerging economies have grown in number and importance as a result of financial market globalisation. However, their role in economic growth and development is enhanced if nascent markets are integrated with well‐established ones. Market integration, measured by the transmission of returns volatility, is identified across a sample of SSA countries, using a unique dataset. Evidence for potential integration between financial markets in Sub‐Saharan Africa (SSA) is found. Spillovers are found across markets, some unidirectional and others bi‐directional. However, continued illiquidity and incomplete institutions indicate that an integrated financial community remains premature, and considerable regulatory reform and harmonisation will be necessary for this to succeed.     

RISK–RETURN TRADE‐OFF AND BEHAVIOUR OF VOLATILITY ON THE SOUTH AFRICAN STOCK MARKET: EVIDENCE FROM BOTH AGGREGATE AND DISAGGREGATE DATA

The study analyses the nature and behaviour of volatility, the risk–return relationship and the long‐term trend of volatility on the South African equity markets using aggregate level, industrial level and sectoral level daily data for the period 1995‐2009. By employing dummy variables for the Asian and the sub‐prime financial crises and the 11 September political shock, the study further examines whether the long‐term trend of volatility structurally breaks during financial crises and major political shocks. Three time‐varying generalised autoregressive conditional heteroskedasticity models were employed: one of them symmetric, and the other two asymmetric. Each of these models was estimated based on three error distributional assumptions. The findings of the study are as follows: First, volatility is largely persistent and asymmetric. Second, risk at both aggregate and disaggregate level is generally not a priced factor on the South Africa (SA) stock market. Third, the threshold autoregressive conditional heteroscedasticity (TARCH) model under the generalised error distribution is the most appropriate model for conditional volatility of the SA stock market. Fourth, volatility generally increases over time, and its trend structurally breaks during financial crises and major global shocks. The policy and investment implications of the findings are outlined.     

Entry,information, and financial development: A century of competition between French banks and notaries

Poorly developed financial markets are widely believed to block economic growth, because only modern financial intermediaries such as banks can mobilize large amounts of financial capital at low cost. This claim is supported by cross country regressions, but the regressions assume that credit intermediation is measured accurately before modern financial intermediaries arrive. If traditional intermediaries were mobilizing large amounts of financial capital before banks or other modern intermediaries appear, then the strength of the relationship between financial development and economic growth would be cast into doubt. Using an original panel dataset from nineteenth-century France, we provide the first estimates of how much financial capital key traditional intermediaries (notaries) were mobilizing for an entire economy during its first century of economic growth, and we analyze the lending that the notaries made possible in French mortgage market. The amount of capital they mobilized turns out to be large. We then analyze the effect that financial deepening had on the notaries as banks spread and find that the banks' and notaries' services were in all likelihood complements. The implication is that the link between financial development and economic growth may therefore be weaker than is assumed.     

The Impact of Firm Size and Liquidity on the Cost of External Finance in Africa

Established illiquidity measures are constructed for emerging markets in Africa and used to determine which best explains trading costs. Costs of equity are derived from an augmented Capital Asset Pricing Model for a sample of emerging financial markets generally ignored in the literature. These include: South Africa and Namibia, three countries in North Africa and four in Sub‐Saharan Africa (SSA), plus London and Paris as examples of integrated markets. Minimum variance portfolios are constructed and asset weights derived, with the sample divided into countries dependent on their legal regime. Portfolio weights are shown to be directly related to well‐regulated markets with high standards of corporate governance and disclosure, and firms seeking cost‐effective finance from SSA stock markets are at a distinct disadvantage compared with those in Northern Africa, South Africa and, in particular, London and Paris.     

LIQUIDITY AND THE INFORMATIONAL EFFICIENCY OF AFRICAN STOCK MARKETS

The hypothesis that a stock market price index follows a random walk is tested for 11 African stock markets, Botswana, Côte d'Ivoire, Egypt, Ghana, Kenya, Mauritius, Morocco, Nigeria, South Africa, Tunisia and Zimbabwe using joint variance ratio tests with finite-sample critical values, over the period beginning in January 2000 and ending in September 2006. The iid random walk hypothesis is rejected in all 11 markets. In four stock markets, Egypt, Nigeria, Tunisia and South Africa, weekly returns are a martingale difference sequence. Liquidity is an important factor which contributes to whether a stock market follows a random walk.     

Financial Development,Foreign Banks and Economic Growth in Africa

This study aims to examine and analyze the impact of financial development and foreign bank penetration on African economies. An empirical study for the period 1995–2015 is conducted using the system GMM estimator. Our empirical results indicate that foreign bank entry has a positive and significant impact on economic growth in the countries of North and Southern Africa, while in the other two regions considered in this study (West and Central Africa, East Africa) the impact is negative and rarely significant. In addition, our results show that the development of financial markets has a positive and significant effect on economic growth only in the Southern African region. The paper concludes that policymakers should focus on long‐term policies to strengthen the financial sector to truly meet the needs of African people.     

THE CHANGING EFFICIENCY OF AFRICAN STOCK MARKETS

This paper classifies formal African stock markets into four categories and discuses the principal characteristics of the seven markets covered in this study: South Africa, Egypt, Morocco, Nigeria, Zimbabwe, Mauritius and Kenya. Using a GARCH approach with time‐varying parameters, a test of evolving efficiency (TEE) is implemented for periods starting in the early 1990s and ending in June 2001. This test detects changes in weak form efficiency through time. The TEE finds that the Johannesburg stock market is weak form efficient throughout the period, and three stock markets become weak form efficient towards the end of the period: Egypt and Morocco from 1999 and Nigeria from early 2001. These contrast with the Kenya and Zimbabwe stock markets which show no tendency towards weak form efficiency and the Mauritius market which displays a slow tendency to eliminate inefficiency. The paper relates weak form efficiency to stock market turnover, capitalisation and institutional characteristics of markets.     

Federal Reserve Communications and Emerging Equity Markets

Work on the impact of U.S. monetary policy on emerging financial markets mostly focuses on official target rate announcements; empirical evidence using data on informal communication channels, such as speeches, is scant. Employing a unique data set covering formal and informal communication channels in a generalized autoregressive conditional heteroskedasticity model framework, we provide comprehensive evidence on the effects of U.S. monetary policy on 17 emerging equity market returns over the period 1998–2009. We find, first, that both monetary policy actions and communications have a significant impact on market returns. Second, target rate change surprises are an important driver of emerging market returns. However, informal communications—particularly when taking into account their higher frequency—have a larger (cumulative) influence on returns than do target rate surprises. Third, during the recent financial crisis, central bank communication played an even more pronounced role. Finally, American emerging markets react more to communications than do non‐American markets.     

THE PREDICTABILITY OF STOCK MARKET RETURNS IN SOUTH AFRICA: PARAMETRIC VS. NON‐PARAMETRIC METHODS

This paper compares the forecasting performance of a sub‐class of univariate parametric and non‐parametric models in predicting stock market returns in South Africa. To account for conditional heteroskedasticity in stock returns data, the non‐parametric model is generated by the conditional heteroskedastic non‐linear autoregressive (NAR) model, while the parametric model is produced by the generalised autoregressive conditional heteroskedastic in mean (GARCH‐M) model. The results of the paper show that the NAR as a non‐parametric model performs better than the GARCH‐M model in short‐term forecasting horizon, and this indicates the importance of a distribution‐free model in predicting stock returns in South Africa.     

Understanding the Growth of African Financial Markets*

Abstract: This paper examines empirically the determinants of financial market development in Africa with an emphasis on banking systems and stock markets. The results show that income level, creditor rights protection, financial repression, and political risk are the main determinants of banking sector development in Africa, and that stock market liquidity, domestic savings, banking sector development, and political risk are the main determinants of stock market development. We also find that liberalizing the capital account promotes financial market development only in countries with high incomes, well‐developed institutions, or both. The powerful impacts of political risk on both banking sector and stock market development suggest that resolution of political risk may be important to the development of African financial markets.     

Cross‐border Mergers and Acquisitions and Financial Development: Evidence from Emerging Asia

This paper examines the relationship between cross‐border mergers and acquisitions (M&A) and financial development in emerging Asian economies. Bilateral cross‐border M&A data for nine emerging Asian economies covering 2000–2009 are analyzed with a sample selection model and a panel data model. The estimation results show that although the banking sector still plays a crucial role in facilitating cross‐border M&A, the role of equity markets has increased in importance because, in addition to cash, the issuance of common stock and the exchange of stocks have become popular forms of payment for M&A deals. Because of the relatively thin market, the primary corporate bond market plays a limited role in supporting cross‐border M&A, which is in contrast to the primary public bond market. However, for the secondary market, the corporate bond market is more effective in facilitating cross‐border M&A. The results also show that financial development in terms of stock and bond markets in their home countries tends to become more important when the target firms reside in more developed countries. In addition to financial development, the paper shows that most cross‐border M&A are invested in technology‐related and resource‐based industries while cheap labor industries are relatively less attractive.     

Major International Information Flows Across the Safex Wheat Market

We study information flows across four wheat futures markets on four continents: Zhengzhou Commodity Exchange (ZCE), South African Futures Exchange (SAFEX), Euronext/Liffe and Kansas City Board of Trade (KCBT). Three approaches for studying information flows among non‐synchronous markets are applied: cointegration techniques, vector autoregressive analysis and multiple regression proposed. Although comparable underlying assets are traded in the four markets, our results indicate that no long‐run links exist among them. ZCE is by far the most endogenous market, and Euronext/Liffe is the most exogenous one. Finally, the model points to KCBT as the most influential and sensitive wheat market. Our findings indicate that the relative openness of the SAFEX wheat market supports information flows and linkages from KCBT and Euronext/Liffe. Therefore, our results suggest that more supportive policies to incentivise higher wheat production in South Africa are required to mitigate the impact of price shocks emanating from the global wheat markets.     

Stock Market Development and Economic Growth: The Case of Selected African Countries

Abstract: This paper studies the effect of stock market development on economic growth in 14 African countries in a dynamic panel data modelling setting. Results largely show a positive relationship between stock market development and economic growth. Further analyses, based on the level of economic development and stock market capitalization, are also conducted. The results reveal that the positive influence of stock market development on economic growth is significant for countries classified as upper middle income economies. On the basis of market capitalization groupings, stock market developments play a significant role in growth only for moderately capitalized markets. The general trend in results shows that low income African countries and less developed stock markets need to grow more and develop their markets to elicit economic gains from stock markets.     

Who Plays the Key Role among Shanghai, Shenzhen and Hong Kong Stock Markets？

In this paper we examine the daily frequency stock market indices of Shanghai, Shenzhen and Hong Kong from January 2000 to June 2012, and use the Morlet wavelet coherence model to determine who is playing the most important role in the financial markets of China. We find that there are significant comovements between these stock markets in the medium and long run. This provides investors with opportunities to increase their capital gains. The Hong Kong stock market plays a leading role in the long run, but its leader position is threatened by fast‐growing Chinese mainland stock markets, especially the Shanghai Stock Exchange. Based on our analysis, the following suggestions apply to the Chinese stock markets: establish and improve international and regional finance centers in Chinese mainland; encourage more qualified institutional investors; reposition the market relations among Hong Kong, Shanghai and Shenzhen; and increase deregulation and internationalization to speed up the integration of financial resources.     

基于在岸金融市场视角的日元国际化进程与启示

最近几年,日元国际化程度不见提高,反而不断被边缘化,成为国际经济活动中的非主流货币。为此,文章从微观角度研究日本国内金融市场对日元国际化进程的支持力度。研究发现,受国内经济长期衰退影响,日本股票市场表现不及其他发达市场;其债券市场发展不平衡,国债市场独大,公司债券市场萎靡,并且资本项目开放不完全限制了债券市场发展;其衍生品市场也缺乏国际竞争力。换言之,日本在岸金融市场发展直接制约了日元国际化进程。     

Stock market development and economic growth in Belgium

This paper investigates the long-term relationship between financial market development and economic development in Belgium. We use a new data set of stock market development indicators to argue that financial market development substantially affected economic growth. We find strong evidence that stock market development caused economic growth in Belgium, especially in the period between 1873 and 1935. Institutional changes affecting the stock exchange explain the time-varying nature of the link between stock market development and economic growth.     

Prostitutes,Pimps, and Brothels: Intermediaries,Information, and Market Structure in Prostitution Markets

Prostitution is a multi‐billion dollar, globally distributed, low‐concentration service industry that is receiving increasing attention in the economics literature. This article focuses on a widespread, but little studied, feature of this environment—the role of intermediaries (pimps or brothel owners) on market outcomes. Prostitution laws and markets are perhaps unique in that transactions between principals (prostitutes and johns) are legal in many countries, while intermediary activity (pimping) is illegal. After surveying the varying cross‐country legality of agents we develop a simple theoretical model to analyze how the presence or absence of intermediaries shifts the distribution of market surplus. We show that eliminating pimps and brothels may shift surplus in non‐obvious ways, depending on the precise function they perform and on whether equilibrium is pooling or separating across “high quality” and “low quality” market segments. The implications of alternative policy regimes (intermediaries legal or illegal) are considered.