Market integration in developed and emerging markets: Evidence from the CAPM

Beta, as measured by the Capital Asset Pricing Model (CAPM), is widely used for pricing stocks, determining the cost of capital, and gauging the extent to which markets are integrated. The CAPM model assumes that equilibrium conditions prevail. The choice of which market portfolio to use in the regression – the home country or global index – depends on the level of global market integration. We present several new empirical observations on the pricing of stocks and market integration. We provide guidance on how practitioners should calculate beta on securities in various developed and emerging markets.     

Experience-based corporate corruption and stock market volatility: Evidence from emerging markets

This paper reassesses how “experience-based” corporate corruption affects stock market volatility in 14 emerging markets. We match the World Bank enterprise-level data on bribes with a unique cross-country macroeconomics dataset obtained from the World Bank development indicators. It is found that wider coverage of “realized” corporate corruption in the emerging markets investigated reduces the stock market volatility, attributed to decrease in uncertainty about government policy with regard to the business environment, as implied by the general equilibrium model of Pastor and Veronesi (2012). Overall, our results suggest that stock price volatility decreases as the uncertainty about government policy becomes more predictable, which is consistent with the testable hypotheses of Pastor and Veronesi (2012).     

Common risk factors in returns in Asian emerging stock markets

This paper examines the application of the Fama and French's (1993) three-factor model in three Asian emerging markets (Hong Kong, Singapore and Taiwan). The empirical evidence is consistent with the US findings that the model can explain most of the variations in average returns. However, we find that the main contributing factor is the contemporaneous market excess returns. The impact of the size effect and book-to-market (BE/ME) factor is limited and in some cases insignificant. When the three-factor model is modified by using lagged market excess returns instead in order to check for the predictability of the market factor, the explanatory power of the model drops substantially but both the risk factors for size and BE/ME are now able to contribute significantly in explaining the cross-sectional variations of stock returns. Their explanatory powers are strongest for small-size with high BE/ME portfolios. The robustness of our results is also checked for the separation of up and down markets periods and January effect.     

The evolution of trading activity in Asian foreign exchange markets

We exploit previously unpublished data on foreign exchange turnover to analyse the institutional setting in which the currencies of non-Japan Asia are traded. Volumes grew rapidly between 2004 and 2007 and the diversity of market participants increased. Nevertheless, liquidity is undermined by foreign exchange controls. For Asian currencies other than JPY, HKD and SGD, non-residents account for a relatively small share of activity and FX swap markets are still in their infancy. Offshore non-deliverable markets have developed in response to controls, causing segmentation in trading activity. Furthermore, Herstatt risk remains high in Asian foreign exchange markets.     

Real-time price discovery in global stock,bond and foreign exchange markets

Using a unique high-frequency futures dataset, we characterize the response of U.S., German and British stock, bond and foreign exchange markets to real-time U.S. macroeconomic news. We find that news produces conditional mean jumps; hence high-frequency stock, bond and exchange rate dynamics are linked to fundamentals. Equity markets, moreover, react differently to news depending on the stage of the business cycle, which explains the low correlation between stock and bond returns when averaged over the cycle. Hence our results qualify earlier work suggesting that bond markets react most strongly to macroeconomic news; in particular, when conditioning on the state of the economy, the equity and foreign exchange markets appear equally responsive. Finally, we also document important contemporaneous links across all markets and countries, even after controlling for the effects of macroeconomic news.     

Real-time price discovery in global stock, bond and foreign exchange markets

Using a unique high-frequency futures dataset, we characterize the response of U.S., German and British stock, bond and foreign exchange markets to real-time U.S. macroeconomic news. We find that news produces conditional mean jumps; hence high-frequency stock, bond and exchange rate dynamics are linked to fundamentals. Equity markets, moreover, react differently to news depending on the stage of the business cycle, which explains the low correlation between stock and bond returns when averaged over the cycle. Hence our results qualify earlier work suggesting that bond markets react most strongly to macroeconomic news; in particular, when conditioning on the state of the economy, the equity and foreign exchange markets appear equally responsive. Finally, we also document important contemporaneous links across all markets and countries, even after controlling for the effects of macroeconomic news.     

Financial crises and contagion vulnerability of MENA stock markets

This paper examines contagion vulnerability and the international and regional financial linkages of the MENA stock markets. The degree of vulnerability of those markets to global and regional financial crises will have important bearings on the respective economies' growth rate, and on their ability to diversify international and regional portfolios. Granger causality tests and impulse response functions reveal that while the GCC equity markets still offer international investors portfolio diversification potentials, those markets are relatively less vulnerable to global and regional financial crises. Moreover, even though the remaining MENA stock markets of Egypt, Morocco, and Tunisia have matured and are now financially integrated with the world stock markets, they tend to exhibit more vulnerability to regional and international financial crises. Their vulnerability to international financial crises is due, on the one hand, to weak regional integration, and to greater economic and financial integration with the more advanced economies on the other.     

Financial liberalization and stock markets efficiency: New evidence from emerging economies

This paper aims to assess the impact of financial liberalization on the degree of informational efficiency in emerging stock markets while considering three types of financial crises, i.e. banking, currency and twin crises. To this end, a treatment effects model with time-varying parameters is estimated for 13 emerging economies from January 1986 to December 2008. Empirical results show that there is a greater efficiency in recent years and that financial liberalization not only improves the degree of efficiency but also reduces the probability of financial crises. They also suggest that improving efficiency depends upon several internal characteristics.     

The internationalization of emerging stock markets

Stock markets in developing countries today account for about 7 per cent of world equity market capitalization, and this share is rising rapidly. Foreign investors have in the past often faced restrictive barriers to access to these emerging markets. A growing number of developing countries have now started to dismantle these barriers, however, resulting in an increasing interest by international portfolio managers in these emerging stock markets.     

Volatilities in emerging MENA stock markets

This article examines the interrelationships among the emerging stock markets of the Middle East and North Africa (MENA) region, as well as the relationship between each MENA stock market and the larger and more developed markets of Europe and the United States. It explores whether MENA stock markets can offer international investors unique risk/return characteristics to diversify international and regional portfolios. This study adds to the existing literature by focusing—for the first time— on the dynamic relationships in the volatilities of the returns in MENA stock markets. The econometric part of the article uses the causality‐in‐variances GARCH model, the TARCH and ARCH‐M models, and VAR analysis to model conditional volatilities in stock market returns and the dynamic responses of volatilities to innovations in conditional variances. © 2006 Wiley Periodicals, Inc.     

Bond markets co-movement dynamics and macroeconomic factors: Evidence from emerging and frontier markets

This paper examines the co-movement dynamics of ten emerging and four frontier government bond markets with the US market and the impact of macroeconomic factors and global bond market uncertainty on the time-varying co-movement. We find that macroeconomic factors play important role in explaining time variations in the bond return co-movement. Specifically, domestic macroeconomic factors have higher relative importance than global factors, with domestic monetary policy and domestic inflationary environment identified as the most influential factors. The global bond market uncertainty, based on an implied volatility measure, has explanatory power in driving co-movement dynamics in emerging and frontier bond markets.     

Intraday volatility in the bond,foreign exchange,and stock index futures markets

Intraday volatility for the Eurodollar, the Euro/dollar foreign exchange rate, and the E‐mini S&P 500 futures contracts traded on a continuous 23‐hour schedule on the Chicago Mercantile Exchange Globex electronic platform is studied. Volatility transmission in a single market across different regions is mainly explained by intraregion volatility (heat waves); interregion volatility (meteor showers) plays a secondary role. The joint impact of liquidity variables such as volume and open interest on volatility is also analyzed. Volume tends to increase volatility, but open interest does not affect it. The results are explained by the type of trading venue. Unlike floor‐based trading systems, in electronic markets open interest does not seem to provide additional information on market liquidity and its relation to volatility beyond any information contributed by volume. © 2008 Wiley Periodicals, Inc. Jrl Fut Mark 28:313– 334, 2008     

Corporate governance and investment-cash flow sensitivity: Evidence from emerging markets

Controlling for country-level governance, we investigate how firms' corporate governance influences financing constraints. Using firm-level corporate governance rankings across 14 emerging markets, we find that better corporate governance lowers the dependence of emerging market firms on internally generated cash flows, and reduces financing constraints that would otherwise distort efficient allocation of investment and destroy firm value. Additionally and more importantly, firm-level corporate governance matters more significantly in countries with weaker country-level governance. This suggests substitutability between firm-specific and country-level governance in determining a firm's investment sensitivity to internal cash flows.     

Tick sizes and relative rates of price discovery in stock,futures, and options markets: Evidence from the Taiwan stock exchange

This study examines the competition in price discovery among stock index, index futures, and index options in Taiwan. The price‐discovery ability of the Taiwan Top 50 Tracker Fund, an exchange‐traded fund based on the Taiwan 50 index is examined. The authors find that, after the minimum tick size in the stock market decreases, the bid–ask spreads of the component stocks of the stock index and the Taiwan Top 50 Tracker Fund get lower, and the contribution of the spot market to price discovery increases. © 2008 Wiley Periodicals, Inc. Jrl Fut Mark 29:74–93, 2009     

Small firm effect: Evidence from Korean stock exchange

The objective of the paper is to examine the small firm and earnings' yield effects on the Korean stock returns during 1982–1988. We find that smaller (or high E/P ratio) firms obtain higher risk-adjusted returns, on average, than larger (or low E/P ratio) firms. We also document that the existence of January effect in Korean stock returns. Unlike the findings for the US market, stock returns of small and as well as large Korean firms are found to be 2 or 3 times higher in January than the other months. However, the well known tax-loss-selling hypothesis can not be used to explained these anomalies because there are no capital tax or loss offsets in Korea.     

The tail risk of emerging stock markets

We investigate tail risk in emerging stock markets at the country, regional and world levels, by comparing the investable and non-investable segments in terms of the expected shortfall of standardized returns and tail dependence on the world market. Employing the skewed Student-t GJR-GARCH model and the SJC copula, we show that most investable portfolios have lower tail risk but higher tail dependence than non-investable ones; emerging markets are likely more dependent on the world market during large joint losses than large joint gains; and tail dependence of the aggregate and investable markets on the world market varies across countries and regions.     

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.     

Margin trading and spillover effects: Evidence from the Chinese stock markets

Using a sample of Chinese stocks, we demonstrate that liquidity and return in stocks with margin trading can spread to other stocks causing spillover effects. Furthermore, the level of margin interest has a positive relation with the degree of spillover effects from relevant stocks. In addition to the deleverage mechanism which has received support from recent studies, we propose the cross-asset learning behavior in stock markets as a new mechanism to explain such relation. The mediation models suggest that the cross-asset learning mechanism can explain a large proportion of the relation between margin trading and spillover effects in stock markets.     

Trading activity in stock index futures markets: The evidence of emerging markets

This study investigates the trading activity of the Taiwan Futures Exchange (TAIFEX) and Singapore Exchange Derivatives Trading Limited (SGX‐DT) Taiwan Stock Index Futures markets by analyzing the intraday patterns of volume and volatility. In addition, the market closure theory, which may explain such patterns, is examined. Overall, the trading pattern appears to be U‐shaped for the TAIFEX futures and U+W‐shaped for the SGX‐DT. For the SGX‐DT futures, volatility follows the same pattern as that of the number of price changes. For the TAIFEX futures, however, after the peak at the close of the spot market, the volatility in the TAIFEX futures drops consistently until the end of the day while volatility in the SGX‐DT still reaches a smaller peak at the close of the futures market. In addition, a visual inspection of the intraday patterns of these two markets shows that the market closure theory can effectively explain the intraday patterns of these two markets. The empirical results support the market closure theory in that liquidity demand from traders rebalancing their portfolios before and after market closures creates larger volume and volatility at both the open and close. © 2002 Wiley Periodicals, Inc. Jrl Fut Mark 22:983–1003, 2002     

Balancing social and political strategies in emerging markets: Evidence from India

This article explores the substitution and complementary effects between political and social strategies on firm performance in the context of an emerging market (EM). Using in‐depth, historical case‐study approach, the article investigates how companies integrate political and social resources in this market. Corporate performance includes traditional measures, such as accounting performance and nonfinancial measures like the ease of doing business. The study finds that social strategies are stronger enablers of firm long‐term performance than political strategies. The latter have a short‐term impact on performance, but their success over time is limited. The main drawback of reliance on political resources in EMs is the lack of political stability, fragmented polity, and weak political coalitions. We identify rather limited evidence of firms using these two strategies as complements. Thus, we suggest that firms should employ both these strategies in the EM.