Entry and barriers to entry in emerging markets

This note briefly introduces the symposium on entry and entry barriers in emerging markets edited by Nauro Campos and Saul Estrin. The symposium contains four inter-related case studies focusing in depth on the relationship between entry of new firms and institutional arrangements in four major emerging markets: Brazil, China, India and Russia. We find that entry rates are not necessarily low in emerging markets, and that institutional quality is a complex and “fuzzy” notion so that its impact on the entry process is not straightforward.     

Are regulations the answer for emerging stock markets? Evidence from the Czech Republic and Poland

Does the emergence of a stock market require a well-developed legal and/or regulatory system? Although historical work by Neal and Davis [Neal, L., & Davis, L. (2005). The evolution of the rules and regulations of the first emerging markets: The London, New York, and Paris stock exchanges, 1792–1914. Quarterly Review of Economics and Finance, 45, 296–311] and Stringham [Stringham, E. (2003). The extralegal development of securities trading in seventeenth century Amsterdam. Quarterly Review of Economics and Finance, 43, 321–344] suggests that securities markets have successfully developed with little government oversight, numerous authors [including Black, B. (2001). The legal and institutional preconditions for strong securities markets. University of California Law Angeles Law Review, 48, 781–855; Coffee, J. (1999). Privatization and corporate governance: The lessons from securities market failure. Journal of Corporation Law, 25, 1–39; Frye, T. (2000). Brokers and bureaucrats: Building market institutions in Russia. Ann Arbor: University of Michigan Press; Glaeser, E., Johnson, S., & Shleifer, A. (2001). Coase versus the Coasians. Quarterly Journal of Economics, 116, 853–899; Mlčoch, L. (2000). Restructuring of property rights: An institutional view. In L. Mlčoch et al. (Eds.), Economic and Social Changes in Czech Society After 1989. Prague: The Karolinum Press; Pistor, K. (2001). Law as a determinant for equity market development – the experience of transition economies. In Peter Murrell (Ed.), The Value of Law in Transition Economies (pp. 249–287). Ann Arbor: Michigan University Press; Stiglitz, J. (1999). Whither reform. Ten years of the transition. Keynote Address, Annual Bank Conference on Development Economics, Washington, DC, April 28–30, 1999; Zhang, X. (2006). Financial market governance in developing countries: Getting the political underpinnings right. Journal of Developing Societies, 2, 169–196] argue that the Czech Republic and other Eastern European governments need more regulation for their newly created stock markets. They maintain that the Warsaw Stock Exchange, which is seen as more regulated, has outperformed the Prague Stock Exchange which is seen as largely unregulated. Thus increased regulations are a key to increased performance. This article, however, maintains that the evidence from the Czech experience has been misinterpreted. This article provides an in depth case study of the Czech stock market and finds that (a) Czech capital markets have been hindered by government intervention from their beginning, (b) that the evidence on Poland's superior performance is not as strong as suggested, and (c) that Czech regulators seem to be unqualified, lack the proper incentives, and are unlikely to benefit the market. Under these circumstances it appears that Neal and Davis (2005:311) are correct that increased government involvement is unlikely to improve the situation.     

Forecasting economic time series using targeted predictors

This paper studies two refinements to the method of factor forecasting. First, we consider the method of quadratic principal components that allows the link function between the predictors and the factors to be non-linear. Second, the factors used in the forecasting equation are estimated in a way to take into account that the goal is to forecast a specific series. This is accomplished by applying the method of principal components to ‘targeted predictors’ selected using hard and soft thresholding rules. Our three main findings can be summarized as follows. First, we find improvements at all forecast horizons over the current diffusion index forecasts by estimating the factors using fewer but informative predictors. Allowing for non-linearity often leads to additional gains. Second, forecasting the volatile one month ahead inflation warrants a high degree of targeting to screen out the noisy predictors. A handful of variables, notably relating to housing starts and interest rates, are found to have systematic predictive power for inflation at all horizons. Third, the targeted predictors selected by both soft and hard thresholding changes with the forecast horizon and the sample period. Holding the set of predictors fixed as is the current practice of factor forecasting is unnecessarily restrictive.     

A comparative goodness-of-fit analysis of distributions of some Lévy processes and Heston model to stock index returns

In this paper, we investigate the goodness-of-fit of three Lévy processes, namely Variance-Gamma (VG), Normal-Inverse Gaussian (NIG) and Generalized Hyperbolic (GH) distributions, and probability distribution of the Heston model to index returns of twenty developed and emerging stock markets. Furthermore, we extend our analysis by applying a Markov regime switching model to identify normal and turbulent periods. Our findings indicate that the probability distribution of the Heston model performs well for emerging markets under full sample estimation and retains goodness of fit for high volatility periods, as it explicitly accounts for the volatility process. On the other hand, the distributions of the Lévy processes, especially the VG and NIG distributions, generally improves upon the fit of the Heston model, particularly for developed markets and low volatility periods. Furthermore, some distributions yield to significantly large test statistics for some countries, even though they fit well to other markets, which suggest that properties of the stock markets are crucial in identifying the best distribution representing empirical returns.     

Value at risk models for volatile emerging markets equity portfolios

This paper investigates the issue of market risk quantification for emerging and developed market equity portfolios. A very wide spectrum of popular and widely used in practice Value at Risk (VaR) models are evaluated and compared with Extreme Value Theory (EVT) and adaptive filtered models, during normal, crises, and post-crises periods. The results are interesting and indicate that despite the documented differences between emerging and developed markets, the most successful VaR models are common for both asset classes. Furthermore, in the case of the (fatter tailed) emerging market equity portfolios, most VaR models turn out to yield conservative risk forecasts, in contrast to developed market equity portfolios, where most models underestimate the realized VaR. VaR estimation during periods of financial turmoil seems to be a difficult task, particularly in the case of emerging markets and especially for the higher loss quantiles. VaR models seem to be affected less by crises periods in the case of developed markets. The performance of the parametric (non-parametric) VaR models improves (deteriorates) during post-crises periods due to the inclusion of extreme events in the estimation sample.     

THE ECONOMICS OF THE UNCOVERED INTEREST PARITY CONDITION FOR EMERGING MARKETS

Abstract Financial account liberalizations since the second half of the 1980s paved the way for the burgeoning literature that investigates foreign exchange market efficiency in emerging markets (EMs) via testing for the uncovered interest parity (UIP) condition. This paper is the first to provide a broad and critical survey on this recent literature. Specifically, we attempt to answer the following questions. First, are the EMs different from the developed economies in the context of the UIP condition? Second, to what extent can these differences contribute to the debate on the UIP literature? Third, what are the empirical challenges specific to the EMs in testing for the UIP condition?     

Diffusion of multi-generational high-technology products

Previous multi-generational product diffusion (MGPD) models were developed based on the diffusion patterns at that time, but may not be adopted in today's cases. By incorporating the effect of customers' forward-looking behaviour, this paper offers a parsimonious and original model that captures the dynamics of MGPD in current high-technology markets. We empirically examine the feasibility of using previous MGPD models and our suggested model to explain the market growth of new products from high-technology industries. The results show that the new model exhibits better curve fitting and forecasting performance than the prior MGPD models in the cases of this study. For marketing researchers, our model and its results suggest customers' forward looking behaviour is perhaps one of the key sales affecting factors that are missing in previous MGPD models in explaining nowadays' cases. For marketing practitioners, this study offers a valuable tool for marketing strategies in high-tech industries.     

OWNERSHIP CONCENTRATION AND FIRM PERFORMANCE IN EMERGING MARKETS: A META‐ANALYSIS

The literature concerned with relations between ownership concentration and corporate performance in emerging markets presents conflicting theoretical predications and inconclusive empirical results. We use meta‐analytical techniques to integrate the diverse empirical findings and investigate factors contribute to the inconsistencies in the empirical evidence. Using 419 correlations collected from 42 primary studies of listed corporations in 18 emerging markets, heterogeneity tests show that only a small proportion of the variation in reported ownership concentration–performance relations can be attributed to sampling error. Our meta‐regressions reveal how population differences, researchers’ modeling choices, and inadequate treatment of endogeneity explain a large portion of the true heterogeneity. After adjusting for these effects, we find ownership concentration has negative relation with firm performance across countries. Our results emphasize the importance of model specification and methods of addressing endogeneity, and support further comparative study of the ownership concentration–corporate performance relation between countries with seemingly similar corporate governance environments.