Financial liberalization and changes in the dynamic behaviour of emerging market volatility: Evidence from four Latin American equity markets

This paper examines whether the dynamic behaviour of stock market volatility for four Latin American stock markets (Argentina, Brazil, Chile and Mexico) and a mature stock market, that of the US, has changed during the last two decades. This period corresponds to years of significant financial and economic development in these emerging economies during which several financial crises have taken place. We use weekly data for the period January 1988 to July 2006 and we conduct our analysis in two parts. First, using the estimation of a Dynamic Conditional Correlation model we find that the short-term interdependencies between the Latin America stock markets and the developed stock market strengthened during the Asian, Latin American and Russian financial crises of 1997–1998. However, after the initial period of disturbance they eventually returned to almost their initial (relatively low) levels. Second, the estimation of a SWARCH-L model reveals the existence of more than one volatility regime and we detect a significant increased volatility during the period of crisis for all the markets under examination, although the capital flows liberalization process has only caused moderate shifts in volatility.     

An empirical analysis of herd behavior in global stock markets

This paper examines herding behavior in global markets. By applying daily data for 18 countries from May 25, 1988, through April 24, 2009, we find evidence of herding in advanced stock markets (except the US) and in Asian markets. No evidence of herding is found in Latin American markets. Evidence suggests that stock return dispersions in the US play a significant role in explaining the non-US market’s herding activity. With the exceptions of the US and Latin American markets, herding is present in both up and down markets, although herding asymmetry is more profound in Asian markets during rising markets. Evidence suggests that crisis triggers herding activity in the crisis country of origin and then produces a contagion effect, which spreads the crisis to neighboring countries. During crisis periods, we find supportive evidence for herding formation in the US and Latin American markets.     

Free trade and the efficiency of financial markets

Prior research has found that countries with freer trade have a lower chance of extreme stock price movements. We develop and test the hypothesis that free trade can also improve the overall informational efficiency of financial markets. Using a broad sample of American Depositary Receipts (ADRs), we show that free trade has a positive association with the efficiency of stock prices. To alleviate endogeneity concerns and strengthen causal inferences we utilize two exogenous events that improved the levels of free trade in various home countries. A difference-in-difference analysis suggests that, relative to control stocks, the price efficiency of treated stocks increased after the liberalization of trade.     

Financial market interdependencies: A quantile regression analysis of volatility spillover

This paper investigates the degree and structure of interdependence between emerging (Asian and Latin American) and developed (USA and Japan) stock markets through the study of volatility spillovers for the period spanning from January 1, 1993 to October 13, 2010. Using both standard GARCH model and quantile regression approach, we find the evidence of significant interdependence between financial markets which may give evidence of volatility transmission. The volatility transmission is closely associated with geographical proximity as well as with crisis periods which confirm the presence of contagion. The analysis of upper and lower quantiles allows observing that the interdependence increases during bullish markets while decreases during bearish markets. Accordingly, the structure of interdependence is asymmetric for both Asian and Latin American emerging markets. These findings open up new insights for government policy makers as well as for managerial purposes.     

Stock market linkages: Evidence from Latin America

This study investigates the dynamic interdependence of the major stock markets in Latin America. Using data from 1995 to 2000, we examine the stock market indexes of Argentina, Brazil, Chile, Colombia, Mexico and Venezuela. The index level series are non-stationary and so we employ cointegration analysis and error correction vector autoregressions (VAR) techniques to model the interdependencies. We find that there is one cointegrating vector which appears to explain the dependencies in prices. The results are robust to sensitivity tests based on translating indexes to US dollars (i.e., a common currency for all the markets) and to partitioning the sample into periods before and after the Asian and Russian financial crises of 1997 and 1998, respectively. Our results suggest that the potential for diversifying risk by investing in different Latin American markets is limited.     

Financial contagion intensity during the COVID-19 outbreak: A copula approach

The sudden and rapid spread of the novel coronavirus (COVID-19) has had a severe impact on financial markets and economic activities all over the world. The purpose of this paper is to investigate the existence and intensity of financial contagion during the COVID-19 outbreak. We use daily series of stock indexes of 10 Asian countries (Taiwan, Hong Kong, Singapore, India, Indonesia, Malaysia, South Korea, Vietnam, Australia and China) and 4 American countries (the United-States, Brazil, Mexico, and Argentina) over the period starting from January 1st, 2014 to June 30th, 2021. Based on a copula approach, the results show that all studied markets are affected by the COVID-19 outbreak and the presence of financial contagion for all American and Asian countries. The results also show that contagion is more intense for American countries than Asian ones. These findings have practical implications, especially for investors, risk managers, and policy makers. The latter should continue to provide liquidity to the international market during this pandemic.     

Financial liberalization and stock market efficiency: an empirical examination of nine emerging market countries

The efficient markets hypothesis in finance suggests that as equity markets are liberalized and made more open to the public, equity prices should reflect the increased availability of information and be more efficiently priced. In this paper, we examine whether emerging market equity prices have become more efficient after financial liberalization. Using two sets of financial liberalization dates, a battery of econometric tests, and data from nine different countries, we find that in spite of theory suggesting the opposite, liberalization does not seem to have improved the efficiency of emerging markets. In fact, most of our statistical tests indicate that the markets were already efficient prior to the actual liberalization.     

AN EMPIRICAL EXAMINATION OF FINANCIAL LIBERALIZATION AND THE EFFICIENCY OF EMERGING MARKET STOCK PRICES

The efficient markets hypothesis in finance suggests that as equity markets are liberalized and made more open to the public, equity prices should reflect the increased availability of information and be more efficiently priced. In this paper, we examine whether emerging market equity prices have become more efficient after financial liberalization. Using two sets of financial liberalization dates, a battery of econometric tests, and data from sixteen countries and three composite portfolios, we find that in spite of theory suggesting the opposite, liberalization does not seem to have improved the efficiency of emerging markets. In fact, most of our statistical tests indicate that the markets were already efficient before the actual liberalization.     

Explaining when developing countries liberalize their financial equity markets

This paper is the first to explain when countries opened their financial equity markets and is the first to explain financial liberalization using a large sample of developing countries. We test several novel hypotheses. We find that equity markets are opened earlier in countries that trade more with developed countries and that have more developed financial markets. Equity markets are opened earlier in democracies, especially if the country's leader is a civilian. Our other findings are consistent with the literature, which has found greater financial market openness in countries receiving more FDI, in richer countries, and in democracies.     

Extreme observations and diversification in Latin American emerging equity markets

In this paper, we focus on the tails of the unconditional distribution of Latin American emerging markets stock returns. We explore their implications for portfolio diversification according to the safety first principle, first proposed by Roy [Econometrica (1952) 20, 431]. We find that the Latin American emerging markets have significantly fatter tails than industrial markets, especially, the lower tail of the distribution. We consider the implication of the safety first principle for a US investor who creates a diversified portfolio using Latin American stock markets. We find that a US investor gains by adding Latin American equity markets to her purely domestic portfolio. For different parameter specifications, we find a more realistic asset allocation than the one suggested by the literature based on the traditional mean-variance framework.     

Speculative bubbles in emerging stock markets and macroeconomic factors: A new empirical evidence for Asia and Latin America

The purpose of this study is firstly to test for the existence of periodically collapsing stock price bubbles in Asian and Latin American emerging stock markets for the period 1990–2009. We use the new non-cointegration test developed by Taylor and Peel (1998) with the Residuals-Augmented Least Squares (RALS) method of Im (1996) and Im and Schmidt (2008) for monthly data of price indexes and dividends. The results show that the hypothesis of formation of bubbles cannot be rejected for all of the studied emerging stock markets. This evidence implies that the co-integration relation between the prices and the dividends is not always supported, indicating that the stock prices do not reflect their fundamental values in the emerging stock markets. We then link speculative bubbles with macroeconomic and financial factors, which is an interesting contribution of this study. The degree of equity market openness is found to be the key factor, positively related to the formation of speculative bubbles in these markets.     

Forms of Foreign Investment Liberalization and Risk in Emerging Stock Markets

I examine the effect of different forms of foreign investment liberalization on risk in emerging equity markets, including international cross-listings and closed-end country funds, and in the domestic equity market as foreign investment restrictions are eliminated. I find that in Latin American markets volatility declines significantly with different forms of foreign investment liberalization, and in Asian markets volatility does not increase significantly. Volatility is driven by domestic factors in South America, but the transmission of volatility from the United States to Mexico increases after liberalization. The market risk exposure increases in Argentina after liberalization, in Chile with an index of American Depositary Receipts, and in Thailand with greater foreign ownership, reducing the diversification benefits of these markets.     

Internationalization and the capital structure of firms in emerging markets: Evidence from Latin America before and after the financial crisis

This study examines the impact of internationalization on the capital structure of firms in emerging markets before and after the financial crisis of 2008, with evidence from five countries in Latin America (Argentina, Brazil, Chile, Mexico, and Peru). We find that before the financial crisis, Latin American MNCs are characterized by lower debt levels than purely domestic firms. However, after the financial crisis, we find that the MNCs are characterized by higher debt levels. This finding suggests that after the financial crisis, the Latin American MNCs (like many firms) may be taking advantage of their access to low interest rates in the global capital markets.     

Persistence characteristics of the Chinese stock markets

Using advanced signal processing, this paper identifies the lack of ergodicity, stationarity, independence and the degree of persistence of the Shanghai (SHI) stock market and Shenzhen A shares (SZI) and B shares (SZBI), before and after the various deregulations and reregulations. Their lack of stationarity and ergodicity are ascribed to (1) the initial interventions in these stock markets by the Chinese government by imposing various daily price change limits, and (2) the changing trading styles, after the Chinese government left these equity markets to develop by themselves. The SHI, SZI, and SZBI are moderately persistent with Hurst exponents slightly greater than the Fickian 0.5 of the Geometric Brownian Motion. These stock markets were considerably more persistent before the deregulations, but they now behave more like Geometric Brownian Motions, i.e., efficiently. Thus, the Chinese stock markets are gradually and properly being integrated into one Chinese stock market. Our results are consistent with similar empirical findings from Latin American, European, and other Asian emerging financial markets.     

The degree of financial liberalization and aggregated stock-return volatility in emerging markets

In this study, we address whether the degree of financial liberalization affects the aggregated total volatility of stock returns by considering the time-varying nature of financial liberalization. We also explore channels through which the degree of financial liberalization impacts aggregated total volatility. We document a negative relation to the degree of financial liberalization after controlling for size, liquidity, country, and crisis effects, especially for small and medium-sized markets. Moreover, the degree of financial liberalization transmits its negative impact on aggregated total volatility through aggregated idiosyncratic and local volatilities. Overall, our results provide evidence in favor of the view that the broadening of the investor base due to the increasing degree of financial liberalization causes a reduction in the total volatility of stock returns.     

Measuring financial contagion: A Copula approach

This paper models dependence with switching-parameter copulas to study financial contagion. Using daily returns from five East Asian stock indices during the Asian crisis, and from four Latin American stock indices during the Mexican crisis, it finds evidence of changing dependence during periods of turmoil. Increased tail dependence and asymmetry characterize the Asian countries, while symmetry and tail independence describe the Latin American case. Structural breaks in tail dependence are a dimension of the contagion phenomenon. Therefore, the rejection of the correlation breakdown hypothesis should not be considered, without further investigation, as evidence of a stable dependence structure.     

Market integration and currency risk in Asian emerging markets

Most of the Asian emerging stock markets started to liberalize their markets in 1990s. In this paper, I examine whether those markets have become integrated with world stock market since the 1990s by estimating and testing a dynamic version of international CAPM (ICAPM) in the absence of purchasing power parity (PPP) using a parsimonious multivariate GARCH-in-Mean (MGARCH-M) approach. I also investigate to what extent the liberalization process has affected the cost of capital and price volatility for each market. The empirical results show that Philippines was segmented from the world stock market before its liberalization date, but no evidence of market segmentation is found for the other five markets (India, Korea, Malaysia, Taiwan, and Thailand) before their liberalization dates. However, all six markets have become integrated after opening up their markets to foreign investors. In addition, the estimated risk premia are lower after the liberalization, indicating that the liberalization process has reduced the cost of capital for their domestic firms. Moreover, there is no evidence of extra market volatility introduced by capital market liberalization, and on the contrary, the markets have become more stabilized through the liberalization process.     

US and Domestic Market Gains and Asian Investors’ Overconfident Trading Behavior

We find that subsequent to both US and domestic market gains, both Asian individual and institutional investors increase their trading and that this effect is more pronounced in bull markets, in periods of relatively favorable investor sentiment, in periods of extremely high market returns, and in markets with short‐sale constraints. We also find that individual investors trade more in response to market gains than institutional investors. Moreover, we find that further integration of Asian stock markets with US stock markets after the Asian financial crisis in 1998 is an important reason for Asian investors’ response to US market gains.     

Equity market liberalization and corporate governance

Equity market liberalizations open up domestic stock markets to foreign investors. A puzzle in the literature is why developing countries exhibit relatively small financial impacts associated with liberalizations. We use cross-firm variation in corporate governance at the time of the official liberalization of the equity market in Korea to test whether governance can explain the extent to which firms benefit when countries liberalize. The results show that better-governed firms experience significantly greater stock price increases upon equity market liberalization. Following the liberalization in Korea, foreign ownership in firms with strong corporate governance was significantly higher than that in firms with weak governance. Better-governed firms also exhibit higher rates of physical capital accumulation after liberalization.     

Who benefits from financial liberalization? Evidence from advanced and emerging market economies

In recent decades most countries have implemented significant reforms to foster financial liberalization. This article examines to what extent these reforms have benefited advanced economies and emerging market economies. We focus on four groups of countries: the G-7, other European countries, Latin America and East Asia over the period 1973–2006. We find evidence supporting the hypothesis that the different forms of financial liberalization affected growth differently in the four groups of countries. The main finding is that the benefits of financial liberalization are more important for advanced economies. In contrast, financial liberalization in emerging market economies has a weak positive impact on growth when its scope is limited, whereas full liberalization has been associated with slower economic growth.