Measuring equity market integration using uncorrelated information flows: Tokyo,London and New York

Equity markets do not pass all overnight information into prices instantly at the opening of trade. We adjust open-to-close return series for non-instantaneous information absorption and then use adjusted series to measure integration among three major equity markets. Because the adjusted daytime return series are uncorrelated, we can accurately measure the size, and identify the sources, of transmissions. Overnight news, as represented by foreign open-to-close returns, explains 13% of opening price variation (close-to-open returns) in New York, 14% in Tokyo and 30% in London. For New York and Tokyo, the largest influences come from the market that trades immediately prior (London and New York respectively) whereas opening price variation in London is linked closer with New York than Tokyo. Foreign volatility spillovers are also significant, and subject to asymmetric effects.     

An investor sentiment barometer — Greek Implied Volatility Index (GRIV)

In this paper, we propose a new measure of Greek equity market volatility based on the prices of FTSE/ATHEX-20 index options. Greek Implied Volatility Index is calculated using the model-free methodology that involves option prices summations and is independent from the Black and Scholes pricing formula. The specific method is applied for the first time in a peripheral and illiquid market as the Athens Exchange.The empirical findings of this paper show that the proposed volatility index includes information about future realized volatility beyond that contained in past volatility. In addition, our analysis indicates that there is a statistically significant negative and asymmetric contemporaneous relationship between the returns of the implied volatility index and the underlying equity index. Finally, the volatility transmission effects on the Greek stock exchange from two leading markets, namely the New York Stock Exchange and the Deutsche Börse, are tested and documented.     

Correlations in price changes and volatility across international stock markets

The short-run interdependence of prices and price volatilityacross three major international stock market is studied. Dailyopening and closing prices of major stock indexes for the Tokyo,London, and New York stock markets are examined. The analysisutilizes the autoregressive conditionally heteroskedastic (ARCH)family of statistical models to explore these pricing relationship.Evidence of price volatility spillovers from New York to Tokyo,London to Tokyo, and New York to London is observed, but noprice volatility spillover effects in other directions are foundfor the pre-October 1987 period.     

U.K. and U.S. trading of British cross-listed stocks: an intraday analysis of market integration

This article analyzes intraday patterns for U.K. and U.S. tradingof British cross-listed stocks. For each market, the intradaypatterns for these stocks closely resemble those of otherwisesimilar, non-cross listed stocks. There is a 2-hour period eachday when cross-listed stocks are traded both in New York andin London. This overlap is characterized by concentrated tradingas private information, originating in New York, gets incorporatedinto prices in both markets. Cross-border competition for orderflowtends to reduce already declining spreads in London. By contrast,New York specialists maintain     

Seasonal and Day-of-the-Week Effects in Four Emerging Stock Markets

The “January effect” and the “weekend effect” have proven to be persistent anomalies in U.S. equity markets. The objective of this paper is to examine seasonal and daily patterns in equity returns of four emerging markets: Hong Kong, Singapore, Malaysia, and the Philippines. These markets are gaining importance with the globalization of business; therefore, it is necessary to examine the efficiency and functioning of these capital markets. Our analysis uses daily data for the 12 years from September 1, 1976, to June 30, 1988. The results support the existence of a seasonal pattern in these markets. Returns in the month of January are higher than any other month for all markets examined except the Philippines. A robust day-of-the-week effect is also found. These markets exhibit a weekend effect of their own in the form of low Monday returns. In addition, there exists a strong “Tuesday effect,” which may be related to the + 13 hour time difference between New York and these emerging markets.     

Internationally cross-listed stock prices during overlapping trading hours: price discovery and exchange rate effects

We analyze exchange rates along with equity quotes for 3 German firms from New York (NYSE) and Frankfurt (XETRA) during overlapping trading hours to see where price discovery occurs and how stock prices adjust to an exchange rate shock. Findings include: (a) the exchange rate is exogenous with respect to the stock prices; (b) exchange rate innovations are more important in understanding the evolution of NYSE prices than XETRA prices; and (c) most (but not all) of the fundamental or random walk component of firm value is determined in Frankfurt.     

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.     

Equity market integration in the NAFTA region: Evidence from unit root and cointegration tests

This study examines integration of the three participating equity markets before and after the 1993 passage of NAFTA based on daily, weekly, and monthly data. As expected, unit root tests for the overall period 1988-2001 and the two subperiods, 1988-1993 (pre-NAFTA) and 1994-2001 (post-NAFTA), indicate that stock prices are non-stationary but stock returns are generally stationary for all three markets for all three periods. However, daily, weekly, and monthly equity prices in the three NAFTA countries are cointegrated only for the post-NAFTA period. Similarly, US stock prices are more integrated with both Canadian and Mexican stock prices after the passage of NAFTA. This evidence of increased financial integration and co-movement in NAFTA equity markets after the passage of NAFTA has important implications for policymakers and managers.     

The market-adjusted investment performance of ADR IPOs and SEOs

Initial public and seasoned equity offerings of American depositary receipts (ADRs) yield significantly positive market-adjusted returns both in early trading and over the longer run. This is in sharp contrast with the long-term performance of initial public offerings and seasoned equity offerings of common stocks in general. In addition, ADRs from emerging markets outperform those originating from developed countries, and those listed on the New York Stock Exchange generate higher after-market returns than those trading on the American Stock Exchange or the National Association of Security Dealers Automated Quotation System.     

Linkages among European and world stock markets

Causal relations and dynamic interactions among equity returns in ten countries for the period 1983–1994 are analysed. An innovation accounting approach based on a multivariate vector autoregressive (VAR) model is used to estimate the proportion of each market return's forecast error attributable to innovations in foreign market returns. Three major results appear. The variance decompositions indicate a strong degree of economic interaction among stock markets. The US stock market has a considerable influence on stock market performance in almost every country, while there is no substantial inter-continental influence from the European stock markets on the world's two largest equity markets in New York and Tokyo. Finally, the pattern of the impulse-response functions illustrates a rapid international transmission of stock market events, supporting the hypothesis of international stock market efficiency.     

RECENT DEVELOPMENTS IN GERMAN CAPITAL MARKETS AND CORPORATE GOVERNANCE

Financial economists continue to point to Germany as a relatively successful model of a "bank-centered," as opposed to a market-based, economy. But few seem to recognize that, in the years leading up to World War I, German equity capital markets were among the most highly developed in the world. Although there are now only about 750 companies listed on German stock exchanges, in 1914 there were almost 1,200 (as compared to only about 600 stocks then listed on the New York Stock Exchange).
Since German reunification in 1990, there have been signs of a possible restoration of the country's equity markets to something like their former prominence. The last 10 years have seen important legal and institutional developments that can be seen as preparing the way for larger and more active German equity markets, together with a more "shareholder-friendly" corporate governance system. In particular, the 1994 Securities Act, the Corporation Control and Transparency Act passed in 1998, and the just released Takeover Act and Fourth Financial Market Promotion
Act all contain legal reforms that are essential conditions for well functioning equity markets. Such legal and regulatory changes have helped lay the groundwork for more visible and dramatic milestones, such as the Deutsche Telekom IPO in 1996, the opening of the Neuer Market in 1997, and, perhaps most important, the acquisition in 2000 of Mannesmann by Vodafone, the first successful hostile takeover of a German company.     

The Timeliness of Income Recognition by European Companies: An Analysis of Institutional and Market Complexity

This study examines international differences in the asymmetric timeliness of accounting earnings by modelling international exposure to different jurisdictions as a firm-specific effect, using an index of regulatory complexity that relates to conditions in each of the capital markets in which the firm's equity is listed. The companies investigated are those with shares cross-listed on European stock exchanges, some of which are also listed in New York. Variation across jurisdictions and markets with respect to earnings timeliness and conservatism can be explained in part as an interaction of market effects and regulatory effects, with some evidence of opposition between the two, and the sensitivity of earnings to stock price changes shows a common, converging trend towards greater accounting conservatism in Europe.     

Price Interactions in a Sequential Global Market: Evidence from the Cross-listed Stocks

In this paper, we investigate the pattern of dynamic interactions among the prices of those stocks that are cross-listed on the three major stock markets of the world, i.e. New York, London and Tokyo. Major findings are: first, regardless of the nationality of stocks, innovations in the 'home' market returns are always fed into the returns in the 'overseas' markets, with the former causing the latter in the Granger sense. However, innovations in the New York market returns of foreign stocks are fed back into their respective home markets, contributing to the price discovery there. Second, the 'succeeding' overseas market, which operates immediately after the home market, plays a dual-role: it conducts the home market innovations to the next-opening overseas market, as well as adds its own innovations. Third, the exchange rate changes substantially influence the overseas market returns, but not the home market returns. The exchange rates appear to play a role in the transmission mechanism mainly via the inter-market price parity.     

Integration of Trans-Atlantic Capital Markets, 1790-1845

During the 1790s, European investors began to purchase substantial quantities of US government and corporate securities. A number of these securities were traded in markets on both sides of the Atlantic. Based on market price quotations we compiled for the same securities in London and New York markets, we ask if these early trans-Atlantic securities markets were integrated, and, if so, when they became integrated. We find little evidence of market integration before 1816, and substantial evidence of it thereafter. Financial globalization - the convergence of financial asset prices in markets on different continents - began earlier than most have suspected.     

EVIDENCE ON ADJUSTMENTS IN MAJOR NATIONAL STOCK MARKET LINKAGES OVER THE 1980S

This paper measures the alterations that have occurred in equity market correlations for six major internationally active stock exchanges between 1980 and 1987. The markets are chosen so as to allow for geographical diversity while still accounting for almost ninety percent of total worldwide equity market capitalization. The VAR variance decomposition technique is used to measure intermarket linkage patterns. We find substantial alterations in intermarket linkage patterns occurring over the 1980s. While the US market (the New York Stock Exchange) is still the dominant financial force in world equities trading, other markets (particularly those in the Pacific Basin region) now account for an increasing impact on observed index correlations in the system. This paper suggests that world financial integration is, in part, responsible for the altered linkage patterns observed over the 1980s.     

Automation, speed, and stock market quality: The NYSE's Hybrid

Automation and trading speed are increasingly important aspects of competition among financial markets. Yet we know little about how changing a market's automation and speed affects the cost of immediacy and price discovery, two key dimensions of market quality. At the end of 2006 the New York Stock Exchange introduced its Hybrid Market, increasing automation and reducing the execution time for market orders from 10 seconds to less than one second. We find that the change raises the cost of immediacy (bid-ask spreads) because of increased adverse selection and reduces the noise in prices, making prices more efficient.     

Transmission of movements in stock markets

The paper analyses the relationships between three stock markets: New York, Tokyo and Frankfurt. The non-simultaneity of the trading times in these three markets determines the results of cross-correlations and regressions with daily returns. To cope with this and other problems, an empirical model is proposed and estimated. This model allows the separation of the ability to influence and the sensitivity of the different markets, and New York is found to be the most influential market, with Tokyo the most sensitive.     

EMERGING EQUITY MARKETS: GROWTH, BENEFITS, AND POLICY CONCERNS

Since the mid-1980s, stock market activity has increased substantiallyin many developing countries. This article first examines themain characteristics of emerging stock markets and illustratesthe evolution of equity prices in these markets during the lastdecade. It then discusses the reasons for the markets' growthand assesses the extent to which they have been affected bydomestic policies and external factors. The authors discussthe likely benefits of these markets, the effects any abruptcorrection in stock prices could have for the economy, and theways in which these markets can be made more efficient.      

TESTS OF RANDOM WALK AND MARKET EFFICIENCY FOR LATIN AMERICAN EMERGING EQUITY MARKETS

Variance-ratio methodology is used to test the hypothesis that Latin American emerging equity market prices follow a random walk. The data are monthly index prices in local currency from December 1975 to March 1991 for Argentina, Brazil, Chile, and Mexico. The variance-ratio tests reject the random walk hypothesis. However, runs tests indicate that Latin American equity markets are weak-form efficient. These empirical findings suggest that domestic investors might not be able to develop trading strategies that would allow them to earn excess returns.