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.     

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.     

Supply Chains,Global Financial Shocks and Firm Behaviour towards Liquidity Needs

Driven by the increasingly important role of supply chains in global production, this paper studies empirical association between global credit‐market shocks and firm behaviour towards liquidity needs across countries and industries. Focusing on the adjustment of working‐capital financing, we find two pieces of supporting evidence from international firm‐level panel data covering the period 2002:I–2012:IV. First, for industries where specific investment in the input supplier–customer relationship is large, firms are more exposed to credit‐market shocks. We find that measures of global credit‐market shocks are negatively associated with trade receivables, trade payables and inventories, conditional on the level of contract intensity in the industries where firms operate. Second, firms in emerging markets are more vulnerable to credit‐market shocks than are firms in developed countries. We are also able to verify the economic significance of sales growth, operating cash flows, cash stock and firm size in the overall adjustment. Our findings highlight the importance of balance‐sheet contagion along supply chains during the 2007–09 global financial crisis.     

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.     

Equity-based entry modes of emerging country multinationals: Lessons from Turkey

Based on a sample of 522 foreign affiliates of Turkish multinational enterprises (MNEs) with varying levels of Turkish equity ownership, this study provides an empirical analysis of the determinants of equity-based entry mode strategies in host country markets. A number of hypotheses are developed to examine the impact of institutional, transaction specific and firm level variables on Turkish MNEs’ choice of equity ownership mode in their foreign affiliates. The results reveal that institutional variables are important in explaining the equity composition of foreign affiliates of Turkish MNEs. Particularly important in determining equity ownership mode were found to be political constraints, linguistic distance, knowledge infrastructure and the extent of parent diversity. Results concerning the influences of the size of the affiliate are contrary to expectations and contradict the findings of previous research. No support was found for the impact of cultural distance on the equity ownership mode of Turkish MNEs in their foreign affiliates. Apart from political constraints, equity ownership choice and its underlying determinants do not vary between emerging and developed host country markets.     

The volatility effect in emerging markets

We examine the empirical relation between risk and return in emerging equity markets and find that this relation is flat, or even negative. This is inconsistent with theoretical models such as the CAPM, which predict a positive relation, but consistent with the results of studies for developed equity markets. The volatility effect appears to be growing stronger over time, which we argue might be related to the increased delegated portfolio management in emerging markets. Finally, we find that the volatility effect in emerging markets is only weakly related to that in developed equity markets, which argues against a common-factor explanation.     

Foreign shocks and international cost of equity destabilization. Evidence from the MENA region

This paper investigates whether foreign financial shocks can destabilize the cost of equity in emerging markets. After a theoretical discussion, we develop annual metrics for the international cost of equity, financial integration, spillovers and shift-contagion vulnerability in a sample of 535 Middle East and North African firms from Egypt, Tunisia, Morocco and Jordan over the 1998–2011 period. We then analyze the impact of foreign shocks on the international cost of equity, using a set of SGMM and PVAR models. Our results indicate that external shocks can increase the cost of equity in mature emerging markets.     

Stock market,credit market,and heterogeneous innovations

The relative importance of credit market development and stock market development in boosting innovation remains a long-standing debate issue. In this study, we document how different types of financial markets development affect heterogeneous innovations. Using a broad sample across 42 developed and emerging economies and a generalized difference-in-differences identification strategy, we find that stock market development leads to significantly higher substantive innovation, especially in young and small firms, but has negative impact on incremental innovation. Conversely, credit market development promotes incremental innovation, especially in mature and large firms, but has negative impact on substantive innovation. Further analyses indicate that stronger shareholder protection enhances the positive impact of stock market on substantive innovation, while stronger creditor rights enhance the promoting effect of credit market on incremental innovation, and even turn the negative impact of credit market on substantive innovation into positive. Our paper provides new insights into the heterogeneous effects of credit market and equity markets on the real economy.     

Power arch modelling of the volatility of emerging equity markets

In developed equity markets the APARCH model of Ding, Granger and Engle [Ding, Z., Granger, C. and Engle, R., 1993. A long memory property of stock market returns and a new model. Journal of Empirical Finance 1, 83–106] has proven to be useful in modelling the leverage and asymmetry effects; power transformations and long memory; and non-normal conditional error distributions that characterise the data. Extending the analysis of Jayasuriya, Shambora and Rossiter [Jayasuriya, S., Shambora, W. and Rossiter, R., 2005. Asymmetric volatility in mature and emerging markets, Working Paper, Ohio University.] to a wider set of emerging markets this paper explores the applicability of the model to emerging markets. The key findings are as follows. First, unlike developed markets where a power term of unity and a conditional standard deviation model appears to be appropriate, emerging markets demonstrate a considerably greater range of power values. Second, unlike developed markets where non-normal conditional error distributions appear to fit the data well, there are a set of emerging markets for which estimation problems arise with a conditional t distribution, and a conditional normal distribution appears to be the preferred option. Third, the degree of volatility asymmetry appears to vary across the set of emerging markets, with the Middle Eastern and African markets having very different volatility asymmetry characteristics to those of the Latin American markets.     

Alternative investments in emerging markets: A review and new trends

This paper provides a review of the alternative investments literature in emerging markets, with a focus on art and wine, angel investment, venture capital and private equity, private debt, hedge funds, crowdfunding, and IPOs. We show that there has been relatively more growth in the scholarly interest in alternative investments in emerging markets compared to alternative investments and compared to emerging markets over the period 2000–2016. We highlight topics that have been the subject of scholarly focus, and identify topics for future research.     

Turnover and return in global stock markets

I study how growth affects liquidity of global stock exchanges and how liquidity determines cross-sectional returns on those stock exchange index portfolios. I measure portfolio liquidity by turnover ratio computed as value of shares traded over the market capitalization. I obtain data from FIBV, an association of global stock exchanges. In a multiple regression model for turnover ratio, I find age, size, type of exchange, competition for order flow, and growth rate to be significant determinants of portfolio liquidity; however, exchange- and time-specific effects are more appropriate for modeling portfolio liquidity. The time effects yield to three distinct regimes, while the exchange-specific effects are surrogates for the legal systems, English common law, and Civil laws of the countries. I estimate the parameters of a multiple regression model in a two-stage GLS framework in which index return is a function of turnover. The GLS method is preferable since a turnover ratio may have a non-stationary, random component. The significant determinants of index return are turnover and volatility, although some of the volatility effect may be a spillover from a January effect. Investors expect higher return from high turnover markets. However, the positive turnover expected return relation is true only in emerging markets; in developed markets expected return is a function of volatility. This result confirms existing empirical evidence that high turnover stock portfolios generate superior returns and further the sources and pricing of risk in emerging and developed markets are different.     

Mexico's integration into the North American capital market

We explore a model of time varying regional market integration that includes three factors for the North American equity market, the local Mexican equity market and the peso/dollar exchange rate. We argue that a useful instrument for the degree of integration is the sovereign yield spread. Applying our methodology to Mexico over the 1991–2002 period, we show that the degree of market integration was higher at the end of the period than at the beginning but that it exhibited wide swings that were related to both global as well as local events. We also discover that Mexico's currency risk is priced. Further, the currency returns process reveals strongly significant asymmetric volatility that is strongly related to the asymmetric volatility of the Mexican equity market returns process. A plausible reason for these results is that currency devaluations in emerging markets like Mexico can cause default-risk crises in local banking systems that mismatch local-currency assets and hard currency liabilities, whereas appreciations produce no such problems. Devaluations that destabilize banking systems are, therefore, more likely than appreciations to increase the volatilities of both the currency's and the equity market's returns.     

Further evidence on Asian stock return behavior

This paper examines the relationship between expected stock returns and size, and market-to-book ratio in five Asian emerging markets: India, Korea, Malaysia, Taiwan and Thailand. Overall, we find a strong size effect in all markets and a significant market-to-book effect in Korea, Malaysia and Thailand. When the tests allow for both variables, the negative relationship between size and average return is less robust; the inclusion of market-to-book equity seems to absorb the role of size in Asian stock returns. Our finding for the Asian market applies to the post-1984 period, thus questioning the assertion of Black [J. Portfolio Manage. 20 (1993) 8] and MacKinlay (1995) that “the value premium is sample-specific”. Although small firms have—to a certain extent—higher average returns than large firms in Asian markets, the market-to-book variable seems to have a consistently stronger role in average returns and would suggest that value stocks have higher average returns than growth stocks. Thus, the higher average return on value stocks in the Asian emerging markets can be considered as a local manifestation of a global phenomenon.     

The Co‐Movement of Credit Default Swap Spreads,Equity Returns and Volatility: Evidence from Asia‐Pacific Markets

We provide a comprehensive analysis of the co‐movement of credit default swap (CDS), equity, and volatility markets in four Asia‐Pacific countries at firm and index level during the period 2007–2010. First, we examine lead–lag relationships between CDS spread changes, equity returns, and changes in volatility using a vector autoregressive model. At the firm level equity returns lead changes in CDS spreads and realized volatility. However, at the index level the intertemporal linkages between the three markets are less clear‐cut. Second, we apply the measures proposed by Diebold and Yilmaz (2014) to an analysis of volatility spillovers among the CDS, equities, and volatility asset classes. The results suggest that realized volatility (at firm level) and implied volatility (at index level) are the main transmitters of cross‐market volatility spillovers. Third, we analyze the impact of various structural factors and confirm the importance of realized volatility of equity returns as a determinant of CDS spreads.     

Zero‐interest Rate Policy and Unintended Consequences in Emerging Markets

Since 2009, central banks in the major advanced economies have held interest rates at very low levels to stabilise financial markets and support the recovery of their economies. This paper outlines the unintended consequences of the prolonged period of very low world funding interest rates in emerging markets. The paper is informed by a Mises–Hayek‐BIS view on credit booms and Mises' law of unintended consequences. Consistent with the presented credit boom view, I provide evidence that the very low world funding interest rates are associated with a rise in volatile capital flows and asset market bubbles in fast‐growing emerging markets. In line with Mises' law, I further show that these unintended consequences give rise to a new wave of interventionism as policymakers in emerging markets increasingly reintroduce financially repressive measures to isolate the economies from foreign capital inflows.     

The Changing Role of Financial Stress,Oil Price,and Gold Price in Financial Contagion among US and BRIC Markets

The objective of this paper is to explore the determining factors behind financial contagion between US and BRIC (Brazil, Russia, India, and China) equity markets. To this end, we investigate the effects of global macroeconomic factors on the time‐varying correlations among these markets obtained by asymmetric dynamic conditional correlation method. Utilizing quantile regression analysis, we examine the determinants of financial contagion at different levels of time‐varying correlations. The results of quantile regression analyses reveal that global financial crisis (GFC) (2008) leads to changes in the dependence structure between dynamic conditional correlations among equity markets and global macroeconomic factors, such as global financial stress, oil prices, and gold prices. Following the GFC, monetary, and fiscal policy changes in the BRIC markets and hence changing macroeconomic risks of these markets are conducive to these changes. Our findings also demonstrate the importance of cross‐market rebalancing channel for information transmission across US and BRIC markets.     

Determinants of the Demand for Home Equity Credit Lines

From the Survey of Consumer Finances conducted in 1989 and 1992 a logit model was tested for demographic and financial influences on household decisions to utilize home equity line credit. Results indicate that among households with credit lines other than credit card lines or business lines, the choice of a home equity credit line in lieu of another type of check credit line is influenced principally by percentage of equity in the home, income, net worth, age of the borrower, and credit price. Several implications may be derived from this study. As the markets reflect more complete information about the low-risk attributes of this credit, the convenience as a payment mechanism, and the tax subsidy to homeowners, it is expected that home equity credit lines users will be distributed more evenly across income and wealth categories.     

Number of creditors and the real effects of credit supply disruptions

This paper examines the role of bank-firm relationships in transmitting credit supply shocks to the real side of the economy in an emerging market. Using a hand-collected dataset for Iranian public companies, we exploit firms' exposure to a bank involved in a massive Ponzi scheme in 2011. We document a nearly 8 percentage point drop in annual employment growth rate for firms connected to the troubled bank following the credit dry-up caused by the scandal. We show that the magnitude of the effect on employment and investment is amplified by bank-firm relationship at least as much as by the financial constraint status found in previous studies. The results highlight the role of bank-firm relationships and the importance of access to multiple creditors in alleviating the consequences of credit supply disruptions.     

Credit constraints, equity market liberalizations and international trade

This paper provides evidence that credit constraints are an important determinant of international trade flows. I exploit shocks to the availability of external finance and examine the impact of equity market liberalizations on the export behavior of 91 countries in the 1980-1997 period. I show that liberalizations increase exports disproportionately more in financially vulnerable sectors that require more outside finance or employ fewer collateralizable assets. This result is not driven by cross-country differences in factor endowments and is independent of simultaneous trade policy reforms. Moreover, it obtains with equal strength in the full panel of countries as well as in both panel and event-study analyses of countries which removed capital controls during the sample period. Finally, the effects of liberalizations are more pronounced in economies with initially less active stock markets, indicating that foreign equity flows may substitute for an underdeveloped domestic financial system. Similarly, opening equity markets has a greater impact in the presence of higher trade costs caused by restrictive trade policies.     

Value investing in emerging markets: risks and benefits

This paper identifies a subset of emerging markets that have higher than average expected returns and studies risk properties of this subset by investment simulations. It is found that: (1) the portfolio of ‘value’ emerging markets generates superior returns; and (2) statistical measures of its risk are close to the corresponding measures for the portfolio of all emerging markets. The statistical significance of these results has been checked by a bootstrap procedure. The results imply that the optimal share of emerging markets increases from 0% for an equally weighted portfolio to approximately 25% for the portfolio of undervalued emerging markets.