Financial liberalization and stock market efficiency: an empirical examination of nine emerging market countries

The efficient markets hypothesis in finance suggests that as equity markets are liberalized and made more open to the public, equity prices should reflect the increased availability of information and be more efficiently priced. In this paper, we examine whether emerging market equity prices have become more efficient after financial liberalization. Using two sets of financial liberalization dates, a battery of econometric tests, and data from nine different countries, we find that in spite of theory suggesting the opposite, liberalization does not seem to have improved the efficiency of emerging markets. In fact, most of our statistical tests indicate that the markets were already efficient prior to the actual liberalization.     

Do foreigners facilitate information transmission in emerging markets?

Using the degree of accessibility of foreign investors to emerging stock markets, or investibility, as a proxy for the extent of foreign investments, we assess whether investibility has a significant influence on the diffusion of global market information across stocks in emerging markets. We show that greater investibility reduces price delay to global market information. We also find that returns of highly investible stocks lead those of noninvestible stocks because they incorporate global information more quickly. These results are consistent with the idea that financial liberalization in the form of greater investibility yields informationally more efficient stock prices in emerging markets.     

Are Asian stock markets efficient? Evidence from new multiple variance ratio tests

This paper tests for the martingale hypothesis in the stock prices of a group of Asian markets. We use new multiple variance ratio tests based on the wild bootstrap and signs. These are non-parametric finite sample tests, which do not rely on large sample theories for statistical inference. This paper also presents Monte Carlo results that these non-parametric tests show superior small sample properties to those of the conventional Chow–Denning test. Both weekly and daily data from 1990 are considered, while moving sub-sample windows are used for the latter to control the sensitivity of the results to a particular sample period. It is found that the Hong Kong, Japanese, Korean and Taiwanese markets have been efficient in the weak-form. The markets of Indonesia, Malaysia and Philippines have shown no sign of market efficiency, despite financial liberalization measures implemented since the eighties. We have also found evidence that the Singaporean and Thai markets have become efficient after the Asian crisis. In general, the results point toward the notion that the pricing efficiency of a market depends on the level of equity market development as well as the regulatory framework conducive of transparent corporate governance.     

TESTS OF RANDOM WALK AND MARKET EFFICIENCY FOR LATIN AMERICAN EMERGING EQUITY MARKETS

Variance-ratio methodology is used to test the hypothesis that Latin American emerging equity market prices follow a random walk. The data are monthly index prices in local currency from December 1975 to March 1991 for Argentina, Brazil, Chile, and Mexico. The variance-ratio tests reject the random walk hypothesis. However, runs tests indicate that Latin American equity markets are weak-form efficient. These empirical findings suggest that domestic investors might not be able to develop trading strategies that would allow them to earn excess returns.     

Stock market cycles, financial liberalization and volatility

In this paper we analyze the cycles of the stock markets in four Latin American and two Asian countries, and we compare their characteristics. We divide our sample in two subperiods in order to account for differences induced by the financial liberalization processes of the early 1990s. We find that cycles in emerging countries tend to have shorter duration and larger amplitude and volatility than in developed countries. However, after financial liberalization Latin American stock markets have behaved more similarly to stock markets in developed countries whereas Asian countries have become more dissimilar. Concordance of cycles across markets has increased significantly over time, especially for Latin American countries after liberalization.     

Random Walks and Market Efficiency Tests of Latin American Emerging Equity Markets: A Revisit

The few existing studies on equity price dynamics and market efficiency for Latin American emerging equity markets show conflicting results. This study uses multiple varianceratio and auto-regressive fractionally integrated moving-average tests and new data (U.S. dollar-based national equity indices for the 1987–1997 period) to clarify these results. Documented evidence shows that equity prices in major Latin American emerging equity markets — Argentina, Brazil, Chile and Mexico—follow a random walk, and that they are, generally, weak-form efficient. In sum, therefore, the evidence suggests that international investors in these markets cannot use historical information to design systematically profitable trading schemes because future long-term returns are not dependent on past returns.     

Explaining when developing countries liberalize their financial equity markets

This paper is the first to explain when countries opened their financial equity markets and is the first to explain financial liberalization using a large sample of developing countries. We test several novel hypotheses. We find that equity markets are opened earlier in countries that trade more with developed countries and that have more developed financial markets. Equity markets are opened earlier in democracies, especially if the country's leader is a civilian. Our other findings are consistent with the literature, which has found greater financial market openness in countries receiving more FDI, in richer countries, and in democracies.     

Asian equity markets: growth,opportunities, and challenges

Asian equity markets have grown significantly in size since the early 1990s, driven by strong international investor inflows, growing regional financial integration, capital account liberalization, and structural improvements to markets. The development of equity markets provides a more diversified set of channels for financial intermediation to support growth, thus bolstering medium-term financial stability. At the same time, as highlighted by the May–June 2006 market corrections, the increasing role of stock markets potentially changes the nature of macroeconomic and financial stability risks, as well as the policy requirements for dealing with these risks.     

Taper Tantrum and Emerging Equity Market Slumps

In the post-global financial crisis period, the central banks of the advanced economies pursued unconventional monetary policies, such as the United States (U.S.) Federal Reserve’s quantitative easing (QE). Those policies and their unwinding may significantly affect cross-border capital flows and thus destabilize the financial systems of emerging markets. For example, emerging markets experienced substantial financial instability during the taper tantrum triggered by U.S. Federal Reserve Chairman Ben Bernanke’s May 2013 announcement of the potential unwinding of QE. In this article, we examine the spillovers from the taper tantrum on emerging markets more rigorously by using econometric analysis to empirically assess the effect on equity markets in emerging markets. Our central finding that virtually all emerging-market equity markets were affected by the taper tantrum highlights the need for emerging-market authorities to remain vigilant about the effects of advanced-economy monetary policies on their financial stability.     

EMERGING EQUITY MARKETS: GROWTH, BENEFITS, AND POLICY CONCERNS

Since the mid-1980s, stock market activity has increased substantiallyin many developing countries. This article first examines themain characteristics of emerging stock markets and illustratesthe evolution of equity prices in these markets during the lastdecade. It then discusses the reasons for the markets' growthand assesses the extent to which they have been affected bydomestic policies and external factors. The authors discussthe likely benefits of these markets, the effects any abruptcorrection in stock prices could have for the economy, and theways in which these markets can be made more efficient.      

Equity market integration in the NAFTA region: Evidence from unit root and cointegration tests

This study examines integration of the three participating equity markets before and after the 1993 passage of NAFTA based on daily, weekly, and monthly data. As expected, unit root tests for the overall period 1988-2001 and the two subperiods, 1988-1993 (pre-NAFTA) and 1994-2001 (post-NAFTA), indicate that stock prices are non-stationary but stock returns are generally stationary for all three markets for all three periods. However, daily, weekly, and monthly equity prices in the three NAFTA countries are cointegrated only for the post-NAFTA period. Similarly, US stock prices are more integrated with both Canadian and Mexican stock prices after the passage of NAFTA. This evidence of increased financial integration and co-movement in NAFTA equity markets after the passage of NAFTA has important implications for policymakers and managers.     

Foreign Banks and the Dual Effect of Financial Liberalization

In emerging countries, credit market liberalization is often motivated with the financial deepening generated by the entry of foreign financial institutions. However, there is a risk that liberalization may benefit internationally active, export‐oriented businesses at the expense of domestically oriented ones. This paper models a two‐sector economy in which foreign lenders are more efficient than local lenders at extracting value from internationally tradable collateral assets. Under some conditions the entry of foreign lenders eases entrepreneurs’ access to the credit market and raises asset prices and output, but in other circumstances it reduces the depth of the credit market and depresses the price of nontradables and output. Liberalization can have a contractionary impact by inducing a reallocation of credit from the nontradables to the tradables sector.     

On cross-border bank credit and the U.S. financial crisis transmission to equity markets

This paper examines the role played by cross-border equity, bond and bank credit flows versus international trade in the transmission of the U.S. financial crisis to equity markets worldwide. We estimate vector autoregressive models with exogenous global factors using monthly data on 36 emerging and developed countries. The results from an eclectic methodology that includes causality tests, generalized impulse responses and forecast error variance decompositions indicate that the crisis is mostly transmitted through bank credit rather than portfolio flows and international trade. The results are robust to altering the exogenous versus endogenous vectors of variables, to measuring equity prices in U.S. dollars or local currency, to averaging the data across countries versus averaging the parameters from individual country estimation, and to redefining the start date of the crisis. The findings endorse the use of banking regulation and capital controls as part of the policy toolkit to limit financial vulnerability.     

Forms of Foreign Investment Liberalization and Risk in Emerging Stock Markets

I examine the effect of different forms of foreign investment liberalization on risk in emerging equity markets, including international cross-listings and closed-end country funds, and in the domestic equity market as foreign investment restrictions are eliminated. I find that in Latin American markets volatility declines significantly with different forms of foreign investment liberalization, and in Asian markets volatility does not increase significantly. Volatility is driven by domestic factors in South America, but the transmission of volatility from the United States to Mexico increases after liberalization. The market risk exposure increases in Argentina after liberalization, in Chile with an index of American Depositary Receipts, and in Thailand with greater foreign ownership, reducing the diversification benefits of these markets.     

Bank Exposure to Interest Rate Risks During Financial Liberalization: Evidence from South Korea

This study documents the changing impact of long and short term interest rate risks on the equity prices of banks in South Korea during the process of financial liberalization. Consistent with the presence of regulatory constraints, Korean bank equity returns are found to be sensitive to both anticipated and unanticipated changes in interest rates in the first period (1976-81) when banks were largely under government control. However, during our last period (1989-99) of liberalization, Korean bank equity returns were found to have a positive association only with unanticipated short-term interest rates. Consistent with the ability to manage other interest rate risks successfully, in this last liberalization period, Korean bank equity returns had no association with long-term or with anticipated short-term interest rates. In view of the continued interest in banking and financial market liberalization among many Asian, African, and formerly socialist countries including China, these results should be of much banking and policy interest. JEL Classifications: G21, G28, E44, L89     

Capital inflows and asset prices: Evidence from emerging Asia

The withdrawal of foreign capital from emerging countries at the height of the recent financial crisis and its quick return sparked a debate about the impact of capital flow surges on asset markets. This paper addresses the response of property prices to an inflow of foreign capital. For that purpose we estimate a panel VAR on a set of Asian emerging market economies, for which the waves of inflows were particularly pronounced, and identify capital inflow shocks based on sign restrictions. Our results suggest that capital inflow shocks have a significant effect on the appreciation of house prices and equity prices. Capital inflow shocks account for – roughly – twice the portion of overall house price changes they explain in OECD countries. We also address cross-country differences in the house price responses to shocks, which are most likely due to differences in the monetary policy response to capital inflows.     

Financial development and innovation: Cross-country evidence

We examine how financial market development affects technological innovation. Using a large data set that includes 32 developed and emerging countries and a fixed effects identification strategy, we identify economic mechanisms through which the development of equity markets and credit markets affects technological innovation. We show that industries that are more dependent on external finance and that are more high-tech intensive exhibit a disproportionally higher innovation level in countries with better developed equity markets. However, the development of credit markets appears to discourage innovation in industries with these characteristics. Our paper provides new insights into the real effects of financial market development on the economy.     

The transmission of emerging market shocks to global equity markets

The paper analyzes whether, and to what extent, emerging market economies (EMEs) have systemic importance for global financial markets, above and beyond their influence during crises episodes. Using a novel database of exogenous economic and political shocks for 14 systematically relevant EMEs, we find that EME shocks not only have a statistically but also economically significant impact on global equity markets. The economic significance of EME shocks is in particular underlined by their remarkably persistent effects over time. Importantly, EMEs are found to influence global equity markets about just as much in “good” times as in “bad” times, though they tend to be stronger during crises or periods of financial turbulence. Finally, we detect a large degree of heterogeneity in the transmission of EME shocks to individual countries' equity markets, stressing the different degrees of financial exposure, which is relatively higher for European equity markets.     

Foreign Speculators and Emerging Equity Markets

We propose a cross-sectional time-series model to assess the impact of market liberalizations in emerging equity markets on the cost of capital, volatility, beta, and correlation with world market returns. Liberalizations are defined by regulatory changes, the introduction of depositary receipts and country funds, and structural breaks in equity capital flows to the emerging markets. We control for other economic events that might confound the impact of foreign speculators on local equity markets. Across a range of specifications, the cost of capital always decreases after a capital market liberalization with the effect varying between 5 and 75 basis points.     

国外商业银行改革研究综述及其启示

发达国家、新兴市场国家和转型经济国家的银行业经历了不同的改革历程,已有研究分别对这些国家的银行业自由化、私有化以及其中的引进外资等各种改革模式,调查或检验了微观层次与宏观层次的经济效果,并对相关的影响因素进行了分析。这些研究涉及单一国家的背景或多国比较,得出的结论不尽相同。在探究影响因素方面,一些研究分析了制度环境的影响,以及改革在不同利益主体间的财富分配,即效率与公平问题。针对中国银行业改革的研究则表明,国有商业银行选择的改革方式对改制效果、外资金融机构进入中国市场的方式以及中国金融业的竞争格局产生了重大影响。