The nature and determinants of comovement between developed,emerging and frontier equity markets: Europe versus Asia‐Pacific

International investors are increasingly attracted towards emerging and frontier markets because of their potential to enhance diversification benefits of a global portfolio. This calls for a rigorous analysis of the nature and determinants of stock market comovement between developed, emerging, and frontier markets in Europe and Asia‐Pacific regions. The findings suggest that unlike their Asia‐Pacific counterparts, European developed, emerging, and frontier stock markets display a higher degree of comovement. Although Asia‐Pacific frontier markets provide good diversification opportunities, investors must be cautioned against their weak financial system. The volatility of returns, gross domestic product growth rate, and the 2008 global financial crisis (GFC) are the key determinants of stock market comovement in Europe. The mechanisms by which comovement in the Asia‐Pacific region is strengthened differ across markets. Comparative analysis of comovement and its determinants across different classes of equity markets and geographies is expected to provide valuable perspectives to global investors, portfolio managers, and policymakers.     

Liquidity and macroeconomic management in emerging markets

Emerging markets have received considerable attention for foreign investment and international diversification due to the possibility of higher earnings and a low level of integration with global equity markets. These high returns often need to be balanced by the high liquidity costs of trading in illiquid emerging markets. Several studies have shown that central bank and government policies are significant determinants of market liquidity. We investigate the influence of monetary and fiscal policy variables on the market and firm level liquidity of eight emerging stock markets of Asia. Using four different (il)liquidity measures and nine macroeconomic variables, we find that changes in the money supply, government expenditure and private borrowing significantly affect stock market liquidity. Illiquidity is also strongly affected by the bank rate, short-term interest rate and government borrowing. We demonstrate that ‘crowding out’ and ‘cost of funds’ effects exist in these markets. Other major findings are that some markets are more sensitive to local macroeconomic news than world factors, the impact on size based portfolios largely depends on the instruments used by the central banks and government, the liquidity of the manufacturing sector is affected by changes in any policy variables, financial institutions are only influenced by monetary policy variables, and the service sector is least affected.     

Frontier and emerging government bond markets

We investigate correlation dynamics and diversification properties of US dollar-denominated debt issued by governments of frontier markets. Our analysis is on the aggregate, regional, and country level, with a sample covering 29 countries over the period 2001–2013. We show that the correlation between the returns of frontier government bond markets and US government bonds is time-varying, but on average close to zero. Correlations with US investment grade corporate bonds, US corporate high yield bonds, and US dollar-denominated debt issued by governments of emerging markets are substantially higher, which limits diversification benefits for investors who already own these asset classes.     

Do global factors impact BRICS stock markets? A quantile regression approach

This paper examines the dependence structure between the emerging stock markets of the BRICS countries and influential global factors. Using the quantile regression approach, our results for the period from September 1997 to September 2013 show that the BRICS stock markets exhibit dependence with the global stock and commodity markets (S&P index, oil, and gold) as well as changes in the U.S. stock market uncertainty (CBOE Volatility Index). This dependence structure is often asymmetric and affected by the onset of the recent global financial crisis. By contrast, the U.S. economic policy uncertainty has no impact on the BRICS stock markets.     

The COVID-19 pandemic and financial markets in Central Europe: Macroeconomic measures and international policy spillovers

This paper investigates the effects of macroeconomic policy announcements on financial markets in three Central European economies: Czechia, Hungary, and Poland (CE–3). We focus on the unprecedented stabilisation policies implemented from March to December 2020 during the COVID-19 pandemic, including unconventional monetary measures and large stimulus programs. Detailed categories of monetary and fiscal measures are introduced into vector autoregressions with exogenous regressors and dynamic conditional correlations, which we estimate using daily data. This allows us to control for policy spillovers from abroad, as well as global risk factors and pandemic-related variables. We find that, in general, macroeconomic policy measures implemented in the CE–3 countries played an important role in stabilising financial markets during the pandemic. We uncover several notable patterns in the reaction of markets to anti-crisis measures across the region. The impact of the monetary policy announcements on 10-year sovereign bond yields was more substantial than on stock market returns and exchange rate returns. The communication of the unconventional tools proved effective in lowering the bond yields. Interestingly, we document that the effects of non-standard measures for some variables, such as the exchange rate, can be qualitatively different from those resulting from a conventional monetary expansion. Even though the domestic monetary events became more important than the fiscal ones, the latter proved relevant for financial market returns, especially when large-scale immediate fiscal measures and tax deferrals were introduced. We also show that the CE–3 economies were subject to the cross-border transmission of policy announcement effects from the Euro Area and the US, although the magnitude of these effects was smaller than expected and varied across the CE–3 countries.     

Determinants of domestic credit levels in emerging markets: The role of external factors

This paper empirically examines the determinants of domestic credit expansion across a wide range of 24 emerging market economies. We use a dynamic panel data estimation technique to investigate the short-run and long-run effects of internal demand and external supply factors, external balance, different measures of trade openness and global uncertainty on domestic credit. We find that loose monetary policy in the domestic market, differences between domestic and global lending rates and real trade openness positively contribute to domestic credit levels. The findings also show that external balance and perceptions of global tail risk negatively affect domestic credit levels.     

Real-time price discovery in global stock,bond and foreign exchange markets

Using a unique high-frequency futures dataset, we characterize the response of U.S., German and British stock, bond and foreign exchange markets to real-time U.S. macroeconomic news. We find that news produces conditional mean jumps; hence high-frequency stock, bond and exchange rate dynamics are linked to fundamentals. Equity markets, moreover, react differently to news depending on the stage of the business cycle, which explains the low correlation between stock and bond returns when averaged over the cycle. Hence our results qualify earlier work suggesting that bond markets react most strongly to macroeconomic news; in particular, when conditioning on the state of the economy, the equity and foreign exchange markets appear equally responsive. Finally, we also document important contemporaneous links across all markets and countries, even after controlling for the effects of macroeconomic news.     

Real-time price discovery in global stock, bond and foreign exchange markets

Using a unique high-frequency futures dataset, we characterize the response of U.S., German and British stock, bond and foreign exchange markets to real-time U.S. macroeconomic news. We find that news produces conditional mean jumps; hence high-frequency stock, bond and exchange rate dynamics are linked to fundamentals. Equity markets, moreover, react differently to news depending on the stage of the business cycle, which explains the low correlation between stock and bond returns when averaged over the cycle. Hence our results qualify earlier work suggesting that bond markets react most strongly to macroeconomic news; in particular, when conditioning on the state of the economy, the equity and foreign exchange markets appear equally responsive. Finally, we also document important contemporaneous links across all markets and countries, even after controlling for the effects of macroeconomic news.     

Modeling recovery rates of corporate defaulted bonds in developed and developing countries

This paper examines the determinants of recovery rates of corporate defaulted bonds in the emerging markets. We use data on defaulted bonds from Moody's ultimate recovery database over the period 2005–2015 to experiment the impact of the borrower characteristics added to the macroeconomic and the bond market conditions on recovery rates. We find evidence that bond recovery rates in emerging and developed countries do not depend on the same factors. Our results show that bond recovery rates in developing countries seem to depend much more on specific characteristics of firms. The financial crisis has affected more significantly subordinated bond recovery rates than secured bonds in emerging markets.     

The determinants of price discovery on bitcoin markets

This paper investigates whether market quality, uncertainty, investor sentiment and attention, and macroeconomic news affect bitcoin price discovery in spot and futures markets. Over the period December 2017–March 2019, we find significant time variation in the contribution to price discovery of the two markets. Increases in price discovery are mainly driven by relative trading costs and volume, and uncertainty to a lesser extent. Additionally, medium-sized trades contain most information in terms of price discovery. Finally, higher news-based bitcoin sentiment increases the informational role of the futures market, while attention and macroeconomic news have no impact on price discovery.     

Cyclical wage movements in emerging markets compared to developed economies: a general equilibrium comment

I examine distinct cyclical properties of labor markets in emerging economies compared to developed ones from a general equilibrium perspective. The evidence in emerging economies shows that (1) wages are more volatile than income, while (2) employment is less volatile and (3) less pro-cyclical than in developed economies. I use a standard open-economy model to study the implications of wealth effects on labor market dynamics in both emerging and developed economies simultaneously. In contrast to the (partial equilibrium) results of the small open economy (SOE) model, I show that in general equilibrium, strong wealth effects on labor supply in emerging economies are necessary to rationalize the evidence. The model is also consistent with empirical regularities of exchange rate fluctuations, namely (1) excess volatility of real exchange rates, and (2) the negative co-movement between the real exchange rate and relative consumption.     

Understanding the sovereign credit ratings of emerging markets

This paper identifies the macroeconomic factors behind the sovereign credit ratings of global emerging markets assigned by Standard and Poor's (S&P). The financial integration and globalization of capital markets have facilitated the capital inflows/outflows among countries. Sovereign credit ratings have served as a signal for countries' economic, financial and political situations. Ratings are very important in the sense that they attract capital inflow and investments. This is especially vital for emerging markets. Although the rating agencies do not explicitly reveal their methodologies, it is possible to guess the effects of several variables on ratings by using various econometric models. Concerning the heavy criticisms on rating agencies' performances, we wish to examine the sovereign credit ratings within a specific country-category. In this essay, we study the effects of macroeconomic factors on the sovereign ratings of emerging markets. Using several approaches, we find that the most relevant factors are Budget Balance/GDP, GDP per capita, Governance Indicators and Reserves/GDP. Moreover, our model predicts up to 93% of all credit rating levels. Interestingly, we obtain that S&P's evaluation of the sovereign credit rating for Turkey performs poorly, especially in the highest rating levels.     

The Determinants of Bond Market Development: Further Evidence from Emerging and Developed Countries

The objective of this paper is to empirically investigate the structural, financial, developmental, institutional, and macroeconomic determinants of bond market development for a sample of 22 emerging and developing countries over the period 1990–2013. We employ both the Prais-Winston and system GMM procedures to tackle the problems of endogeneity among the explanatory variables and our measure of bond market development, group-wise heteroscedasticity, and contemporaneous cross-sectional and serial correlations in the residuals. Our results suggest that a combination of structural, financial and institutional factors seem to exert a significant effect on bond markets. Indeed, economic size, trade openness, investment profile, GDP per Capita, bureaucratic quality, and size and concentration of banking system are positively related to bond market development, while interest rate volatility and fiscal balance are negatively associated with the development of bond markets. Those results are robust to the inclusion of developed countries' bond markets, international bonds issuers, and to possible structural breaks.     

Liquidity and stock returns in emerging equity markets

Using data for 27 emerging equity markets for the period January 1992 through December 1999, we document the behavior of liquidity in emerging markets. We find that stock returns in emerging countries are positively correlated with aggregate market liquidity as measured by turnover ratio, trading value and the turnover–volatility multiple. The results hold in both cross-sectional and time-series analyses, and are quite robust even after we control for world market beta, market capitalization and price-to-book ratio. The positive correlation between stock returns and market liquidity in a time-series analysis is consistent with the findings in developed markets. However, the positive correlation in a cross-sectional analysis appears to be at odds with market microstructure theory that has been empirically supported by studies on developed markets. Our findings regarding the cross-sectional relation between stock returns and liquidity is consistent with the view that emerging equity markets have a lower degree of integration with the global economy.     

Bond yields in emerging economies: It matters what state you are in

While many studies have looked into the determinants of yields on externally issued sovereign bonds of emerging economies, analysis of domestically issued bonds has hitherto been limited, despite their growing relevance. This paper finds that the extent to which fiscal variables affect domestic bond yields in emerging economies depends on the level of global risk aversion. During tranquil times in global markets, fiscal variables do not seem to be a significant determinant of domestic bond yields in emerging economies. However, when market participants are on edge, they pay more attention to country-specific fiscal fundamentals, revealing greater alertness about default risk.     

Does corruption increase emerging market bond spreads?

We study the relationship between corruption and borrowing costs for governments and firms in emerging markets. Combining data on bonds traded in the global market with survey data on corruption compiled by Transparency International, we show that countries that are perceived as more corrupt must pay a higher risk premium when issuing bonds. The global bond market ascribes a significant cost to corruption: an improvement in the corruption score from the level of Lithuania to that of the Czech Republic lowers the bond spread by about one-fifth. This is true even after controlling for macroeconomic effects that are correlated with corruption. We find little evidence that investors became more sensitive to corruption in the wake of the Asian financial crisis.     

Emerging market sovereign bond spreads and shifts in global market sentiment

The paper studies how the relationship between emerging market sovereign bond spreads, economic fundamentals and global financial market conditions differs across three regimes of global market sentiment. Following the identification of periods characterized by low, medium and high volatility in financial markets, we analyze the behavior of spreads from three different angles. First, we demonstrate that the cross-country correlation of spreads increases in high-volatility regimes, implying that countries cannot fully decouple from developments in other emerging markets during periods of distress. Second, using the interactions of several domestic and global variables with the probabilities of each regime prevailing in a given period as the explanatory variables of spreads, the fixed effects panel estimation shows that while country-specific fundamentals are important determinants of spreads in each regime, the importance of global financial conditions increases in high-volatility periods. Third, we show that countries can benefit from stronger fundamentals in the form of lower exposure of their sovereign spreads to unfavorable regime shifts in global market sentiment.     

Experience-based corporate corruption and stock market volatility: Evidence from emerging markets

This paper reassesses how “experience-based” corporate corruption affects stock market volatility in 14 emerging markets. We match the World Bank enterprise-level data on bribes with a unique cross-country macroeconomics dataset obtained from the World Bank development indicators. It is found that wider coverage of “realized” corporate corruption in the emerging markets investigated reduces the stock market volatility, attributed to decrease in uncertainty about government policy with regard to the business environment, as implied by the general equilibrium model of Pastor and Veronesi (2012). Overall, our results suggest that stock price volatility decreases as the uncertainty about government policy becomes more predictable, which is consistent with the testable hypotheses of Pastor and Veronesi (2012).     

Macroeconomic factors and emerging market equity returns: a Bayesian model selection approach

Macroeconomics figures prominently in analyses of emerging markets, both as an asset class and for allocations within emerging markets. However, the literature on the drivers of emerging markets equity returns generally pays little attention to macroeconomic factors. This paper investigates the predictive power of several candidate macroeconomic factors for emerging market equity returns using the Bayesian model selection approach developed in Cremers [Cremers, K.J.M., 2002. Stock return predictability: a Bayesian model selection perspective. The Review of Financial Studies 15, 1223–1249]. The results provide strong evidence against all of the macro factors considered with the exception of exchange rate changes and, consistent with the existing literature, provide strong support for several financial factors, but not beta, as significant predictors of excess returns.     

Macroeconomic shocks and the co-movement of stock returns in Latin America

This paper studies the economic sources underlying the co-movement of real stock returns in Latin America. Following the literature on structural vector autoregressive models (SVARs), I use long-run restrictions to identify three structural shocks: demand, supply, and portfolio shocks. For some countries, portfolio shocks are important factors behind real stock returns. Furthermore, these shocks seem to be important in explaining cross-country co-movement patterns. However, these findings are not statistically strong due to the degree of uncertainty about the estimates of the importance of each structural shock and the cross-correlation coefficients. Therefore, macroeconomic shocks (supply and demand) cannot be neglected in accounting for the dynamics of real stock returns.