Benefits of international diversification with investment constraints: An over-time perspective

This paper investigates the benefits and asset allocation of the optimal international diversification for the U.S.A. investor while considering various portfolio constraints. Although the global financial market is becoming more integrated, the findings suggest that adding lower and upper weighting bounds reduces, but does not completely eliminate, the potential economic value of international investment. The addition of investment constraints makes asset allocation more feasible and decreases the volatility in portfolio return. The time-variation in the optimal asset allocation implies that fund managers should rebalance international portfolios dynamically. The out-of-sample test suggests that the Markowitz model with constraints realizes trivial improvement in mean-variance efficiency but still demonstrates significant reduction in risk.     

On forecasting interest rates: An efficient markets perspective

Efficient markets do not preclude economic agents from successfully forecasting movements in short-term interest rates. For brief forecast intervals, however, ex ante changes in long-term rates are sufficiently close to zero that economic agents are not likely to improve upon the no-change prediction of the martingale model. Economic agents, in effect, are not likely to succeed in forecasting short-term movements in long-term interest rates. This paper illustrates the closeness of the martingale approximation for two sets of Canadian interest rates data, emphasizing the importance of the forecast interval. The paper then examines three sets of recorded forecasts of Canadian interest rates and finds results consistent with the theoretical discussion.     

Testing conditional asset pricing models: An emerging market perspective

The CAPM as the benchmark asset pricing model generally performs poorly in both developed and emerging markets. We investigate whether allowing the model parameters to vary improves the performance of the CAPM and the Fama–French model. Conditional asset pricing models scaled by conditioning variables such as Trading Volume and Dividend Yield generally result in small pricing errors. However, a graphical analysis reveals that the predictions of conditional models are generally upward biased. We demonstrate that the bias in prediction may be the consequence of ignoring frequent large variation in asset returns caused by volatile institutional, political and macroeconomic conditions. This is characterised by excess kurtosis. An unconditional Fama–French model augmented with a cubic market factor performs the best among some competing models when local risk factors are employed. Moreover, the conditional models with global risk factors scaled by global conditioning variables perform better than the unconditional models with global risk factors.     

Sudden changes in volatility in emerging markets: The case of Gulf Arab stock markets

This article examines sudden changes in volatility for five Gulf area Arab stock markets using the iterated cumulative sums of squares (ICSS) algorithm and analyzes their impacts on the estimated persistence of volatility. This algorithm identifies large shifts in volatility of the stock markets during the weekly period 1994 to 2001. In contrast to Aggarwal et al. [Aggarwal, R., Inclan, C., & Leal, R., 1999, Volatility in emerging markets. Journal of Financial and Quantitative Analysis 34, 33-55], this paper found that most of the Gulf Arab stock markets are more sensitive to major global events than to local and regional factors. The 1997 Asian crisis, the collapse of oil prices in 1998 after the crisis, the adoption of the price band mechanism by OPEC in 2000, and the September 11th attack have been found to have consistently affected the Gulf markets. Accounting for these large shifts in volatility in the GARCH(1,1) models significantly reduces the estimated persistence of the volatility in the Gulf stock markets.     

Integration of 22 emerging stock markets: A three-dimensional analysis

We apply the three-dimensional analysis of wavelet coherency to examine the integration of 22 emerging stock markets with the U.S. market. We find a high degree of co-movement at relatively lower frequencies between the U.S. and the 22 individual emerging markets. Our results show that the strength of co-movement, however, differs by country. For example, we report a high degree of co-movement between the U.S. and Brazil, Mexico and Korea, but low co-movement with and Egypt and Morocco. Our analyses also document a general change in the pattern of the market relationship after 2006, where we detect co-movements at relatively higher frequencies. Co-movement at the highest frequencies is, however, weak for fluctuations with duration less than a year. Our findings imply that investing selectively in emerging markets may provide significant diversification benefits which, invariably, depend on the investment horizon.     

The performance of frequent acquirers: Evidence from emerging markets

This study examines the returns to 2340 merger deals conducted by 1122 frequent acquirers in 17 emerging markets, during the period 1985 to June 2008. Our primary findings are as follows. Serial acquirers in emerging countries on average experience a declining pattern in returns with subsequent deals, but the pattern is not strong. However, conditional on successful initial deals, the declining pattern is strong for the majority of countries, is large in terms of the magnitude, and is significant in the multivariate regression analysis. We interpret the results as somewhat supportive of the hubris behavior as a factor in serial acquisitions (Roll, J Business 59, 1986). We also find a stronger declining pattern for more developed markets but no substantial difference between civil and common-law countries; the former might be explained by generally greater and increasing competition for control in more developed markets.     

A re-examination of Libor rigging: a time-varying cointegration perspective

Using a time-varying cointegration framework, this paper examines the alleged manipulation of the London interbank offered rate (Libor) during the 2007–2009 financial crisis. Bank quotes are found to be poor indicators of their financing costs in the crisis period. The aberration in the estimated values of the cointegrating and error correction parameters governing the long-run equilibrium relationship between bank quotes and the final Libor suggests banks were submitting lower quotes. Further analysis which controls for an individual bank’s credit risk, market wide credit and liquidity risks, and a common market factor, demonstrate possible evidence of Libor rigging during the crisis period.     

Determinants of information technology investments: The case of ATM in an emerging economy

This paper examines the determinants of automatic teller machine (ATM), a kind of information technology (IT), in the Taiwanese banking industry. The lessons learned from Taiwan's banking industry can be applied to China's banking industry to facilitate the understanding of the IT adoption strategies of Chinese financial institutions. Factors that are expected to have impact on IT investment in general and on ATM investment in particular are identified from three perspectives, namely operating scale perspective, deposit service perspective, and operating cost perspective. The results of this study indicate that operating scale, banking deposit service and operating cost are all significant determinants of ATM investment in the Taiwan banking industry. The results are useful for those banks and financial institutions outside of China in deciding their ATM investment strategies in China when trying to enter and penetrate the Chinese banking market.     

Equity market integration in Central European emerging markets: A cointegration analysis with shifting regimes

We investigate the existence of long-run relations between emerging Central European stock markets and the mature stock markets of Europe and the United States. Allowing for instability in these long-run relations, we obtain evidence of links between the Central European markets that is stronger than has previously been reported. We also show that the Central European markets display equilibrium relations with their mature counterparts, which persist after controlling for structural changes. It follows that Central European markets have become more integrated with global markets.     

Accounting-based regulation in emerging markets: The case of China's seasoned-equity offerings

In China, listed companies are required to achieve a minimum return on equity (ROE) before they can apply for permission to issue additional shares through seasoned-equity offerings (SEO). We document two benefits of this accounting-based regulation in China. First, this regulation limits the increase in the supply of shares and the dilution of existing share prices. The Chinese stock market reacted positively to the announcement of this accounting-based regulation. Moreover, investors' reactions to SEO, announcements are less negative since the accounting-based regulation was introduced than before the regulation was enacted. The second benefit is that the regulation reduces adverse selection in SEO, as shown by the finding that prior to this regulation, firms below the ROE threshold underperformed the market after their SEO, much like what has been observed in other markets; while those above the threshold outperformed the market. Thus, although positive accounting theory predicts that regulations based on accounting numbers create incentives for managers to manipulate their accounting numbers, accounting-based regulations in China seem to serve some useful purposes.     

Multivariate FIAPARCH modelling of financial markets with dynamic correlations in times of crisis

This paper applies the vector AR-DCC-FIAPARCH model to eight national stock market indices' daily returns from 1988 to 2010, taking into account the structural breaks of each time series linked to the Asian and the recent Global financial crisis. We find significant cross effects, as well as long range volatility dependence, asymmetric volatility response to positive and negative shocks, and the power of returns that best fits the volatility pattern. One of the main findings of the model analysis is the higher dynamic correlations of the stock markets after a crisis event, which means increased contagion effects between the markets. The fact that during the crisis the conditional correlations remain on a high level indicates a continuous herding behaviour during these periods of increased market volatility. Finally, during the recent Global financial crisis the correlations remain on a much higher level than during the Asian financial crisis.     

Disclosure and cost of equity capital in emerging markets: The Brazilian case

In this paper, we conjecture that the weak association between disclosure and cost of equity capital found in the literature (Botosan, 1997) can be caused by the high-level corporate disclosure environment found in the United States. We hypothesize that in low-level corporate disclosure environments the variability in disclosure practices across firms will be larger than in the United States, and, consequently, the marginal effect of voluntary disclosure policies will be higher. Using a newly developed Brazilian Corporate Disclosure Index (BCDI), our results confirm this hypothesis. Disclosure is strongly associated with ex ante cost of equity capital for Brazilian firms. The results are more pronounced for firms with less analyst coverage and low ownership concentration, as expected.     

The impact of foreign bank entry in emerging markets: Evidence from India

This paper uses the entry of foreign banks into India during the 1990s—analyzing variation in both the timing of the new foreign banks’ entries and in their location—to estimate the effect of foreign bank entry on domestic credit access and firm performance. In contrast to the belief that foreign bank entry should improve credit access for all firms, the estimates indicate that foreign banks financed only a small set of very profitable firms upon entry, and that on average, firms were 8 percentage points less likely to have a loan after a foreign bank entry because of a systematic drop in domestic bank loans. Similar estimates are obtained using the location of pre-existing foreign firms as an instrument for foreign bank locations. Moreover, the observed decline in loans is greater among smaller firms, firms with fewer tangible assets, and firms affiliated with business groups. The drop in credit also appears to adversely affect the performance of smaller firms with greater dependence on external financing. Overall, this evidence is consistent with the exacerbation of information asymmetries upon foreign bank entry.     

Stock market volatility and the crash of 1987: evidence from six emerging markets

This paper studies volatility, risk premia and the persistence of volatility in six emerging stock markets before and after the 1987 stock market crash. The empirical investigation is conducted by means of the GARCH in the mean model (GARCH-M) and monthly data from Argentina, Greece, India, Mexico, Thailand, and Zimbabwe between January of 1976 and August of 1994. Results indicate changes in the ARCH parameter, risk premia and persistence of volatility before and after the 1987 crash. But these noted changes are not uniform and depend upon the individual markets. Factors other than the 1987 crash may also be responsible for the changes.     

Term structure of return correlations and international diversification: evidence from European stock markets

The paper examines the term structure of correlations of weekly returns for the stock market in the US, Japan and nine European countries between 1988 and 1994. Stock indices are decomposed into permanent and temporary components using a canonical correlation analysis and then short- and long-horizon return correlations are calculated from these two price components. The empirical results reveal that the relationships of return correlations among these stock markets are not stable across return horizons. While correlations, in general, tend to increase with return horizons, there are several cases showing that correlations decline when investment horizons increase.     

Effects of taxation for option writers: an Australian perspective

Writing an option is a taxable event for Australian investors. This method of taxation penalizes investors who hold open short option positions over the tax year end by accelerating their tax liability relative to the timing of the economic gain from writing options. This paper examines the levels of open interest in the Australian Stock Exchange over the change in financial year to determine whether investors time their transactions to avoid this tax acceleration. The results show that level of open interest is lower in the last month of the financial year after controlling for non‐tax determinants of option demand.     

The political economy of residual state ownership in privatized firms: Evidence from emerging markets

We investigate the political determinants of residual state ownership for a unique database of 221 privatized firms operating in 27 emerging countries over the 1980 to 2001 period. After controlling for firm-level and other country-level characteristics, we find that the political institutions in place, namely, the political system and political constraints, are important determinants of residual state ownership in newly privatized firms. Unlike previous evidence that political ideology is an important determinant of privatization policies in developed countries, we find that right- or left-oriented governments do not behave differently in developing countries. These results confirm that privatization is politically constrained by dynamics that differ between countries.     

Effectiveness of copula-extreme value theory in estimating value-at-risk: empirical evidence from Asian emerging markets

A traditional Monte Carlo simulation using linear correlations induces estimation bias in measuring portfolio value-at-risk (VaR), due to the well-documented existence of fat-tail, skewness, truncations, and non-linear relations in return distributions. In this paper, we consider the above issues in modeling VaR and evaluate the effectiveness of using copula-extreme-value-based semiparametric approaches. To assess portfolio risk in six Asian markets, we incorporate a combination of extreme value theory (EVT) and various copulas to build joint distributions of returns. A backtesting analysis using a Monte Carlo VaR simulation suggests that the Clayton copula-EVT evinces the best performance regardless of the shapes of the return distributions, and that in general the copulas with the EVT provide better estimations of VaRs than the copulas with conventionally employed empirical distributions. These findings still hold in conditional-coverage-based backtesting. These findings indicate the economic significance of incorporating the down-side shock in risk management.     

Private Benefits of Control: An International Comparison

We estimate private benefits of control in 39 countries using 393 controlling blocks sales. On average the value of control is 14 percent, but in some countries can be as low as ?4 percent, in others as high a +65 percent. As predicted by theory, higher private benefits of control are associated with less developed capital markets, more concentrated ownership, and more privately negotiated privatizations. We also analyze what institutions are most important in curbing private benefits. We find evidence for both legal and extra‐legal mechanisms. In a multivariate analysis, however, media pressure and tax enforcement seem to be the dominating factors.