Stock Market Development and the Decline of the Portion of Dividend Payers throughout the World

I contend that stock market development has substantially contributed to the decline of dividend payers worldwide. Using data from 31 countries, my research shows that stock market development makes firms in countries with a relatively high dependence on stock market financing less likely to pay dividends, to pay less, and more likely to omit. These results also are robust to the sample selection, the time‐varying firm characteristics, and the differences in legal systems, capital market scales, and country‐level information disclosure.     

International diversification strategies: Revisited from the risk perspective

Following Roll [Roll, R., 1992. Industrial structure and comparative behaviour of international stock market indices. Journal of Finance 47, 3–42] and Heston and Rouwenhorst [Heston, S.L., Rouwenhorst, G.K., 1994. Does industrial structure explain the benefits of international diversification. Journal of Financial Economics 36, 3–27], researchers have decomposed stock returns into country and industry components. Evidence suggests that industry components have become more important in recent years, but the reasons for this are unclear. Existing research concentrated mainly on stock returns in industrial countries. In this paper we consider instead the decomposition of stock risks within emerging equity markets. We provide a rationale for this procedure and its relationship to return decompositions. The results provide new firm-specific evidence on the debate over country and industry components, their stability over time, and the implications for portfolio diversification.     

International portfolio diversification: Currency,industry and country effects revisited

We examine the relative importance of country, industry, world market and currency risk factors for international stock returns. Our approach focuses on testing the mean-variance efficiency of the various factor portfolios. An unconditional analysis does not show significant differences between country, industry and world portfolios, nor any role for currency risk factors. However, when we allow expected returns, volatilities and correlations to vary over time, we find that equity returns are mainly driven by global industry and currency risk factors. We propose a novel test to evaluate the relative benefits of alternative investment strategies and find that including currencies is critical to take full advantage of the diversification benefits afforded by international markets.     

International Stock Return Comovements

We examine international stock return comovements using country‐industry and country‐style portfolios as the base portfolios. We first establish that parsimonious risk‐based factor models capture the data covariance structure better than the popular Heston–Rouwenhorst (1994) model. We then establish the following stylized facts regarding stock return comovements. First, there is no evidence for an upward trend in return correlations, except for the European stock markets. Second, the increasing importance of industry factors relative to country factors was a short‐lived phenomenon. Third, large growth stocks are more correlated across countries than are small value stocks, and the difference has increased over time.     

The Importance of Industry and Country Effects in the EMU Equity Markets

Most empirical studies find that country effects are larger than industry effects in stock returns, although industry effects have gained in importance recently. Our results support the dominance of country effects relative to industry and common effects in the EMU equity markets in the 1975–2001 period. However, there is an increasing importance of industry effect relative to country effect in the 1990s. In fact, industry effects is similar in magnitude to country effect in the post‐euro period. The evolution of the ratio of country to industry effect is explained by the decrease in the cross‐sectional variance of interest rate movements across EMU countries. Thus, there is evidence that nominal convergence has reduced the differences between national equity markets.     

Does institutional ownership matter for international stock return comovement?

We study the link between international stock return comovements and institutional investment. We test whether the rise of institutional ownership has increased cross-country correlations and decreased cross-industry correlations. Using stock-level institutional holdings across 45 countries during the 2001–2010 period, we find that industry and global factors are relatively more important the country factors in explaining stock return variation among stocks with higher institutional ownership. Industry diversification strategies are more beneficial than country diversification strategies for stocks with high institutional ownership. We show that cross-border portfolio investment is a powerful force of international capital market integration and convergence of asset prices.     

Another look at the role of the industrial structure of markets for international diversification strategies

This paper re-examines the extent to which gains from international diversification are due to differences in industrial structure across countries. Recent papers by Roll (1992), Journal of Finance 47, 3–42 and Heston and Rouwenhorst (1994), Journal of Financial Economics 36, 3–27 investigate this issue and find conflicting evidence. Using a new database, the Dow Jones World Stock Index, with coverage in 25 countries and over 66 industry classifications, we decompose comprehensively both country and industrial sources of variation. We confirm that little of the variation in country index returns can be explained by their industrial composition. We also uncover differences in the proportion of variation in industry index returns that is captured by country and industry factors and discuss the implications for global diversification strategies.     

CAN STOCK MARKET LIBERALIZATION IN EMERGING ECONOMIES MITIGATE LEGAL SYSTEMS DEFICIENCIES?

We document positive valuation effects around the time of stock market liberalization. We find that the valuation effects are larger for countries with civil law traditions compared with countries with common law origins. Similarly, we find that countries with weaker shareholder protections exhibit greater market valuation increases compared with countries with stronger shareholder protections. The results reinforce the importance of country legal systems and of shareholder protections in determining the quality of corporate governance systems and financial market outcomes. The findings suggest that stock market liberalization may mitigate deficiencies in the existing institutional environments not supportive of effective corporate governance systems.     

Transition to the Euro and its impact on country portfolio diversification

By examining the impact of the introduction of the Euro on stock markets and on country diversification within the Eurozone, the evidence does not suggest a high risk to the stock market to justify a risk premium as a result of currency union. Although the Euro market integration has increased inter-country correlations, it does not preclude gains from international diversification, which partially rely on the non-Eurozone countries for an optimal portfolio in a mean-variance framework. Furthermore, the empirical evidence supports that there is a significant stationarity of average correlations over time between pre-Euro and post-Euro periods, and it has improved since the introduction of the Euro. Also, results show that the Euro produced a change in volatility with a different pace within the Eurozone vis-à-vis non-Eurozone countries, to support a direct and opposite relationship between volatility and correlation.     

U.S. takeovers in foreign markets: Do they impact emerging and developed markets differently?

We investigate the effect that U.S. acquisitions of targets in emerging and developed countries have on the targets' rivals by measuring their stock price reaction to the acquisition announcement. On average, emerging market rivals react positively to these acquisitions while the reaction in developed markets is insignificant. In developed markets, the main factors explaining the reaction of rival firms are individual rival characteristics such as rival size, efficiency, growth opportunities, and leverage. In contrast, in emerging markets, country, industry, and acquisition characteristics such as economic development, shareholder protection, and the target's public status, industry, and percent acquired, play a more important role.     

Transmission of the financial and sovereign debt crises to the EMU: Stock prices,CDS spreads and exchange rates

This paper tests for the transmission of the 2007–2010 financial and sovereign debt crises to fifteen EMU countries. We use daily data from 2003 to 2010 on country financial and non-financial stock market indexes to analyze the stock market returns for three country groups within EMU: North, South and Small. The following results hold for both the North and South European countries, while the smallest countries seem to be relatively isolated from international events. First, we find strong evidence of crisis transmission to European non-financials from US non-financials, but not for financials. Second, in order to test how the sovereign debt crisis affects stock market developments we split the crisis in pre- and post-Lehman sub periods. Results show that financials become significantly more dependent on changes in the difference between the Greek and German CDS spreads after Lehman’s collapse, compared to the pre-Lehman sub period. However, this increase is much smaller for non-financials. Third, before the crisis euro appreciations coincide with European stock market decreases, whereas this relationship reverses during the crisis. Finally, this reversal seems to be triggered by Lehman’s collapse.     

How Does Investor Sentiment Affect Stock Market Crises? Evidence from Panel Data

We test the impact of investor sentiment on a panel of international stock markets. Specifically, we examine the influence of investor sentiment on the probability of stock market crises. We find that investor sentiment increases the probability of occurrence of stock market crises within a one‐year horizon. The impact of investor sentiment on stock markets is more pronounced in countries that are culturally more prone to herd‐like behavior, overreaction and low institutional involvement.     

Measuring time-varying financial market integration: An unobserved components approach

We measure the time-varying degree of world stock market integration of five developed countries (Germany, France, UK, US, and Japan) over the period 1970:1–2011:10. Time-varying financial market integration of each country is measured through the conditional variances of the country-specific and common international risk premiums in equity excess returns. The country-specific and common risk premiums and their conditional variances are estimated from a latent factor decomposition through the use of state space methods that allow for GARCH errors. Our empirical results suggest that stock market integration has increased over the period 1970:1–2011:10 in all countries but Japan. And while there is a structural increase in stock market integration in four out of five countries, all countries also exhibit several shorter periods of disintegration (reversals), i.e. periods in which country-specific shocks play a more dominant role. Hence, stock market integration is measured as a dynamic process that is fluctuating in the short run while gradually increasing in the long run.     

Stock Market Development and Financial Intermediaries: Stylized Facts

World stock markets are booming, and emerging stock marketsaccount for a disproportionate share of this growth. Yet economistslack a common concept or measure of stock market development.This article collects and compares a broad array of indicatorsof stock market and financial intermediary development, usingdata from forty-four developing and industrial countries duringthe period from 1986 to 1993. The empirical results exhibitwide cross-country differences for each indicator as well asintuitively appealing correlations between various indicators.The article constructs aggregate indexes and analyzes them todocument the relationship between the emergence of stock marketsand the growth of financial intermediaries. It produces a setof stylized facts that facilitates and stimulates research intothe links among stock markets, economic development, and corporatefinancing decisions.     

Explaining international stock correlations with CPI fluctuations and market volatility

This paper investigates the dynamic correlations among six international stock market indices and their relationship to inflation fluctuation and market volatility. The current research uses a newly developed time series model, the Double Smooth Transition Conditional Correlation with Conditional Auto Regressive Range (DSTCC-CARR) model. Findings reveal that international stock correlations are significantly time-varying and the evolution among them is related to cyclical fluctuations of inflation rates and stock volatility. The higher/lower correlations emerge between countries when both countries experience a contractionary/expansionary phase or higher/lower volatilities.     

Cash Flows and Discount Rates,Industry and Country Effects and Co‐Movement in Stock Returns

We apply the Campbell decomposition to industry‐by‐country, national, global industry, and world stock index returns using 1995–2003 data. World, global industry, and country factors are all important for each of the two key components of stock returns: news about future dividends and news about future discount rates. Furthermore, the world component of future discount rates is more important than the idiosyncratic component, while the reverse is true for news about future dividends. Our results are broadly consistent with co‐movement in future discount rates arising from perceptions of common elements of risk in international equity markets.     

MARKET TIMING OF INTERNATIONAL STOCK MARKETS USING THE YIELD SPREAD

We use probit modeling to forecast bear stock markets in the United States and in eight major foreign stock markets. In general, we find that the U.S. yield spread contains more important market‐timing information than does the home‐country yield spread for profitable market timing. At a 35% probability screen, our simulations show that the U.S. dollar (representative local currency) investor could earn a median compound annual return across eight foreign (non‐U.S.) stock markets of 15.75% (17.67%) by following a market‐timing strategy versus a median buy‐and‐hold return of 13.56% (16.55%).     

Realizing the volatility impacts of sovereign credit ratings information on equity and currency markets: Evidence from the Asian Financial Crisis

We examine the effects of different types of sovereign rating announcements on realized stock and currency market volatilities and cross-asset correlations around periods of financial crises. Using intraday market data and sovereign ratings data for nine sample countries in the Asia-Pacific region over 1997–2001, we find that currency and stock markets react somewhat heterogeneously to various rating announcements and that stock markets are more responsive to rating news than currency markets. We find new evidence that ratings events have significant and asymmetric impacts on intraday market data and that national market attributes influence rating impacts during financial crises.     

Empirical relationship between macroeconomic volatility and stock returns: Evidence from Latin American markets

Emerging market stock returns have been characterized as having higher volatility than returns in the more developed markets. But previous studies give little attention to the fundamentals driving the reported levels of volatility. This paper investigates whether dynamics in key macroeconomic indicators like exchange rates, interest rates, industrial production and money supply in four Latin American countries significantly explain market returns. The MSCI world index and the U.S. 3-month T-bill yield are also included to proxy the effects of global variables. Using a six-variable vector autoregressive (VAR) model, the study finds that the global factors are consistently significant in explaining returns in all the markets. The country variables are found to impact the markets at varying significance and magnitudes. These findings may have important implications for decision-making by investors and national policymakers.     

International portfolio diversification is better than you think

Using aggregate data on bilateral cross-border equity holdings, we investigate whether investors correctly hedge their over-exposure to domestic risk (the well-known equity home bias) by investing in foreign stock markets that have low correlation with their home stock market. To deal with the endogeneity of stock return correlations, we instrument current correlations with past correlations. Controlling for many determinants of international portfolios, we find that, all else equal, investors do tilt their foreign holdings towards countries, which offer better diversification opportunities. The diversification motive that we uncover is stronger for source countries exhibiting a higher level of home bias.