Foreign institutional ownership and stock market liquidity: Evidence from Indonesia

From January 2002 to August 2007, foreign institutions held almost 70% of the free-float value of the Indonesian equity market, or 41% of the total market capitalization. Over the same period, liquidity on the Jakarta Stock Exchange improved substantially with the average bid–ask spread more than halved and the average depth more than doubled. In this study we examine the Granger causality between foreign institutional ownership and liquidity, while controlling for persistence in foreign ownership and liquidity measures. We find that foreign holdings have a negative impact on future liquidity: a 10% increase in foreign institutional ownership in the current month is associated with approximately 2% increase in the bid–ask spread, 3% decrease in depth, and 4% rise in price sensitivity in the next month, challenging the view that foreign institutions enhance liquidity in small emerging markets. Our findings are consistent with the negative liquidity impact of institutional investor ownership in developed markets.     

Exchange rate risk in the US stock market

Kolari et al. (2008) show that exchange rate risk measured by contemporaneous exchange rate changes is priced in the US stock market. However, by construction, their exchange rate risk factor has a strong correlation with the size factor, and their exchange rate sensitivity portfolios have a strong factor structure. To test whether their results are spurious, we carry out two sets of tests. The first set is motivated by Lewellen et al. (2010), where the second set is motivated by the voluminous literature which suggests that stock returns are heavy-tailed (e.g. Rachev and Mitnik, 2000). Different from Kolari et al. (2008), we find that exchange rate risk measured by contemporaneous exchange rate changes is not priced in the US stock market if we use industry portfolios which do not have a strong factor structure as the testing assets or if we use more robust methods to estimate firm-specific exchange rate sensitivity. Our findings therefore suggest that researchers take a new perspective on exchange rate risk.     

Foreign exchange risk pricing and equity market segmentation in Africa

This work is the first to investigate simultaneously the occurrence of unconditional currency risk pricing and equity market segmentation in Africa’s major stock markets. The multi-factor asset pricing theory provides the theoretical framework for our model. We find strong evidence suggesting that Africa’s equity markets are partially segmented. However, we find insufficient evidence to reject the hypothesis that foreign exchange risk is not unconditionally priced in Africa’s stock markets. This result is robust to alternative foreign exchange rate-adjusted return measures. These findings suggest that international investors can diversify into Africa’s equity markets without worrying about unconditional risks associated with foreign exchange rate fluctuations.     

Pricing currency risk in the stock market: Evidence from Finland and Sweden 1970-2009

We investigate the role of currency risk on stock markets in two interlinked Nordic countries exhibiting a gradual move from fixed to floating exchange rates. We apply the Ding and Engle (2001) covariance stationary specification in a multivariate GARCH-M setup to test a conditional international asset pricing model. Using a sample period from 1970 to 2009, we find that the currency risk is priced in both stock markets, and that the price and the risk premium are lower after the floatation of the currencies, especially for Finland. We also find the cross-country exchange rate shock from Finland to affect the price of currency risk in Sweden, but not vice versa. Finally, we discuss some of the potential issues in applying multivariate GARCH-M specifications in tests of asset pricing models.     

Go long or short in pyramids? News from the Egyptian stock market

Similar to other emerging economies, the Egyptian stock market has recently experienced a remarkable run-up but also a major downturn. This paper analyzes the stock market from two angles. First, it compares the performance of the major stock price index with its underlying fundamentals. Second, it explores the relationship between the Egyptian and other stock markets. The paper finds that (i) there is some evidence against a stable relationship between the Egyptian index and its fundamental value; and (ii) short-term correlations and long-term cointegrating relations provide conflicting signals on the value of Egyptian stocks as a means of diversification.     

Political crises and the stock market integration of emerging markets

This paper investigates the role of political crises in explaining the degree of stock market integration in emerging markets over the period 1991-2006. Using the International Crisis Behavior database, which contains detailed information on political crises around the world, and employing data on more than 15,500 firms, we assess whether political crises affect stock market integration in 19 emerging markets in South and East Asia, Latin America, and Central and Eastern Europe. We conclude that crises with certain characteristics generally reduce the level of stock market integration in these regions. In particular, the beginning of a political crisis, its severity, the involvement of the US in the conflict, and the number of parties involved in a crisis all have impacts on the level of stock market integration in these markets.     

Testing stock market linkages for Poland and Hungary: A multivariate GARCH approach

This paper examines the linkages between the emerging stock markets in Warsaw and Budapest and the established markets in Frankfurt and the U.S. By using a four-variable asymmetric GARCH-BEKK model, we find evidence of returns and volatility spillovers from the developed to the emerging markets. However, as the estimated time-varying conditional covariances and the variance decompositions indicate limited interactions among the markets, the emerging markets are weakly linked to the developed markets. The implication is that foreign investors may benefit from the reduction of risk by adding the stocks in the emerging markets to their investment portfolio.     

Financial market development and the importance of internal cash: Evidence from international data

We examine the impact of financial market development on the extent to which firms have to rely on internal capital for making investments. Using international data from 31 countries for the 1987–1997 period, we find evidence of a negative relationship between financial market development and the importance of internal capital. The evidence is consistent across different estimation procedures, alternative measures of financial constraints and cash flow, and the use of bootstrapped standard errors. Finally, we find that the distortionary effect of negative cash flow observations reported earlier for US data extends to international data as well.     

Financial integration and emerging markets capital structure

This paper investigates the impact of country-level financial integration on corporate financing choices in emerging economies. Examining 4477 public firms from 24 countries, we find that corporate leverage is positively related to credit market integration and negatively related to equity market integration. As integration proceeds to higher levels, high-growth firms seem to obtain more debt than low-growth firms; large firms seem to obtain more debt - especially long-term debt - and issue more equity than small firms. Also, there is evidence that firms are able to borrow more funds in countries with more efficient legal systems during integration process.     

Financial crisis and stock market efficiency: Empirical evidence from Asian countries

This paper empirically investigates the effects of the 1997 financial crisis on the efficiency of eight Asian stock markets, applying the rolling bicorrelation test statistics for the three sub-periods of pre-crisis, crisis, and post-crisis. On a country-by-country basis, the results demonstrate that the crisis adversely affected the efficiency of most Asian stock markets, with Hong Kong being the hardest hit, followed by the Philippines, Malaysia, Singapore, Thailand and Korea. However, most of these markets recovered in the post-crisis period in terms of improved market efficiency. Given that the evidence of nonlinear serial dependencies indicates equilibrium deviation resulted from external shocks, the present findings of higher inefficiency during the crisis are not surprising as in the chaotic financial environment at that time, investors would overreact not only to local news, but also to news originating in the other markets, especially when the news events were adverse.     

Stock market synchronization and monetary integration

This paper focuses on the relationship between stock market comovements and monetary integration. A panel specification is used to explain bilateral stock market return correlations between fifteen developed economies over the period 1975-2006. Time fixed effects are included to capture global shocks and we also examine the role of bilateral trade linkages and international financial integration. Monetary integration leads to stronger stock market synchronization, both through the elimination of exchange rate volatility and through the common monetary policy and the convergence of inflation expectations. Trade and financial integration also contribute to higher stock market return comovements.     

Regime-switching analysis of ADR home market pass-through

We model and estimate ADRs’ home market pass-through and pricing-to-market using a regime-switching approach, which nests the two regimes in a conditional capital asset pricing model and treats any changes in these two regimes probabilistically. Our results from the 1998 to 2006 data show that the pricing-to-market regime dominates ADRs from China and Japan, whereas the home market pass-through regime dominates ADRs from Argentina and Germany when their respective home markets are volatile.     

Explaining international stock correlations with CPI fluctuations and market volatility

This paper investigates the dynamic correlations among six international stock market indices and their relationship to inflation fluctuation and market volatility. The current research uses a newly developed time series model, the Double Smooth Transition Conditional Correlation with Conditional Auto Regressive Range (DSTCC-CARR) model. Findings reveal that international stock correlations are significantly time-varying and the evolution among them is related to cyclical fluctuations of inflation rates and stock volatility. The higher/lower correlations emerge between countries when both countries experience a contractionary/expansionary phase or higher/lower volatilities.     

Stock market liberalization and operating performance at the firm level

I use firm-specific measures of openness to foreign investors to study the impact of stock market liberalization on firm-level operating performance. In a sample of over 1,100 firms from 28 countries, firms with stocks that are open to foreign investors experience higher growth, greater investment, greater profitability, greater efficiency, and lower leverage. Strategies to address potential endogeneity suggest that the observed relation reflects, at least in part, a causal effect of openness on operating performance.     

Time-varying market integration and stock and bond return concordance in emerging markets

We investigate the extent to which emerging stock market integration affects the joint behavior of stock and bond returns using a two-stage semi-parametric approach. Using a sample of 18 emerging markets, we find an unambiguous and robust link between emerging stock market integration and stock–bond return decoupling. We explain this with a decline in the segmentation risk premia in equities modeled by De Jong and De Roon [De Jong, F., De Roon, F.A., 2005. Time-varying market integration and expected returns in emerging markets. Journal of Financial Economics 78, 583–613] that leads to increased demand for stocks and reduced or unchanged demand for bonds. Our findings deliver new insights into the financial liberalization and stock–bond comovement literatures.     

World market risk,country-specific risk and expected returns in international stock markets

This paper determines whether the world market risk, country-specific total risk, and country-specific idiosyncratic risk are priced in an international capital asset pricing model (ICAPM). Portfolio-level analyses, country-level cross-sectional regressions, stacked time-series, and pooled panel regressions indicate that the world market risk is not, but country-specific total and idiosyncratic risks are significantly priced in an ICAPM framework with partial integration. This result is robust to different methods for estimating risk measures, different investment horizons, and after controlling for the countries’ aggregate dividend yield, earnings-to-price ratios, inflation risk, exchange rate uncertainties, aggregate volatility risk, and past return characteristics. The main findings turn out to be insensitive to the choice of one-factor vs. multifactor models used to estimate systematic and idiosyncratic risk measures.     

Calendar anomaly in the Greek stock market: Stochastic dominance analysis

Using stochastic dominance (SD) analysis, this paper examines calendar anomalies in the Athens Stock Exchange (ASE), an emerging market thrust into a path of rapid transition by the economic integration of Greece with the European Union. SD offers two essential analytical attributes: It requires no assumptions regarding the normality of return distributions, and it imposes few restrictions on investors' risk-return tradeoff preference. Between 1985 and 2004, we find temporal predictability of returns in the ASE — a strong “day” effect and rather weak “week” and “January” effects. Our findings on the week and January effects are far less robust as compared to those reported in earlier studies based on parametric tests.     

The European Union,the Euro,and equity market integration

We use industry valuation differentials across European countries to study the impact of membership in the European Union as well as the Eurozone on both economic and financial integration. In integrated markets, discount rates and expected growth opportunities should be similar within one industry, irrespective of the country, implying narrowing valuation differentials as countries become more integrated. Our analysis of the 1990–2007 period shows that membership in the EU significantly lowered discount rate and expected earnings growth differentials across countries. In contrast, the adoption of the Euro was not associated with increased integration. Our results do not change when the sample is extended to include the recent crisis period.     

Return sign forecasts based on conditional risk: Evidence from the UK stock market index

Recent theoretical works have found a link between return sign forecastability and conditional volatility. This paper compares the predictive performance of the conditional country risk and the conditional residual risk in forecasting the direction of change in the return on the UK stock market index. The conditional country risk and the conditional residual risk are estimated using the bivariate BEKK-GARCH technique and the direction of change in the UK stock market index is modelled using the binary logit approach. Both the in-sample and the out-of-sample predictions suggest that, as a predictor, the conditional residual risk is superior to the conditional country risk. Our findings support the residual risk model while contradicting the traditional capital asset pricing model (CAPM). Moreover, our tactical asset allocation simulations show that when the conditional residual risk is used in conjunction with multiple-threshold trading strategies to guide the investment decisions, the actively managed portfolio achieves greater returns than the return on a buy and hold portfolio.     

Dynamic European stock market convergence: Evidence from rolling cointegration analysis in the first euro-decade

The introduction of the euro epitomizes European economic integration. This paper assesses the dynamic process of convergence among four major European stock markets in the first euro-decade. Using tests that allow for endogenously determined breaks in cointegrating relationships and rolling cointegration analysis, we show that although some convergence has been taking place over time, it is very much an ongoing process. There is also evidence that the German and French markets appear to be the ones with a higher degree of convergence while the dominant position of Germany within the eurozone seems to be (re)affirmed by tests conducted herein.