Global impact of loss of confidence in Asian emerging markets

With the interest rate hike in the US and, more recently, in the UK, sudden stops in investments and capital reversals are apparent in the Asian emerging economies. A modelling approach is taken, using the G-Cubed model, to simulate the potential global economic impacts, with a focus on Asia. The results demonstrate that myopic fiscal interventions in Asian emerging economies could result in short-term stimulus, at the expense of long-term growth. The stimulus in advanced economies too would be short-lived, diverting the benefits to unintended fractions in the global economy. Advanced economies that minimally change their trade and investment patterns tend to avoid distortionary impacts of the crisis.     

Smuggling and parallel markets for exports

This article proposes a model of smuggling consistent with the coexistence of firms involved in strictly legal trade with firms involved in smuggling. A framework is presented in which a firm's degree of risk aversion and the level of government enforcement are the determining factors in the decision of the firm to smuggle or not to smuggle. The model demonstrates that smuggling must be welfare enhancing or all smuggling activity will end.

This article also provides a theoretical analysis of the effect enforcement has on smuggling and welfare. Increased enforcement is shown to have a negative effect on welfare. Government enforcement is assumed to have two policy instruments it can use to combat smuggling: (1) the probability of detection and (2) the monetary penalty. The relative effectiveness of government enforcement instruments in deterring smuggling is shown to be dependent on the degree of firm risk aversion.     

Syndicated loans in emerging markets

There has been a considerable expansion of the volume of syndicated loans in emerging markets in the recent years. We provide the first analysis of the determinants of the decision of banks to syndicate a loan on a sample of loan facilities from 50 emerging countries. We show the significant role of loan characteristics and of financial development, banking regulation, and legal institutions, in the decision to syndicate a loan. We support the efforts of authorities to increase banking competition and efficiency, and to implement binding banking regulation on capital requirement to promote the expansion of syndicated loans.     

Clustering in emerging equity markets

We consider pairwise tail behavior of return series for identifying the most important emerging markets clusters. Pairs of markets belonging to the same group present similar type and strength of interdependence during stressful times, represented by a common copula and a statistically equivalent measure of tail dependence. By collapsing data from d markets in to a group we overcome the difficult problem of finding their (higher dimensional) d-variate distribution. Results may help portfolio managers to deal with risk due to co-movements within clusters. We provide examples on how this can be done. Our study contributes to the discussion about the international association among stock markets during turbulent periods, and does not confirm the intuition that the observed association between extremes should be credited to linkages to leading markets. The study also confirms the importance of stock selection, particularly among the non-dominant stocks, instead of holding market-value weighed portfolios of stocks from countries within the same region.     

Systematic risk in emerging markets: the D-CAPM

There is by now a growing literature arguing against the use of the CAPM to estimate required returns on equity in emerging markets (EMs). One of the characteristics of this model is that it measures risk by beta, which follows from an equilibrium in which investors display mean–variance behavior. In that framework, risk is assessed by the variance of returns, a questionable and restrictive measure of risk. The semivariance of returns is a more plausible measure of risk and can be used to generate an alternative behavioral hypothesis (mean–semivariance behavior), an alternative measure of risk for diversified investors (the downside beta), and an alternative pricing model (the downside CAPM, or D-CAPM for short). The empirical evidence discussed below for the entire Morgan Stanley Capital Indices database of EMs clearly supports the downside beta and the D-CAPM over beta and the CAPM.     

Corporate governance in emerging markets: A survey

This paper reviews recent research on corporate governance, with a special focus on emerging markets. It finds that better corporate governance benefit firms through greater access to financing, lower cost of capital, better performance, and more favorable treatment of all stakeholders. Numerous studies show these channels to operate at the level of firms, sectors and countries—with causality increasingly often clearly identified. Evidence also shows that voluntary and market corporate governance mechanisms have less effect when a country's governance system is weak. Importantly, how corporate governance regimes change over time and how this impacts firms are receiving more attention recently. Less evidence is available on the direct links between corporate governance and social and environmental performance. The paper concludes by identifying issues requiring further study, including the special corporate governance issues of banks, and family-owned and state-owned firms, and the nature and determinants of public and private enforcement.     

Capitalizing on emerging markets

Miller, R. (1998) Selling to Newly Emerging Markets, Westport, CT: Quorum Books, 274 pages, ISBN 1 56720 044 3 Dixon, J. and Newman, D. (1998) Entering the Chinese Market: The Risks and Discounted Rewards, Westport, CT: Quorum Books, 1 56720 137 7 Bullis, D. (1998) Doing Business in Today's India, Westport, CT: Quorum Books, 320 pages, ISBN 1 56720 136 9     

The big emerging markets

During his tenure as Under Secretary of Commerce, the author was one of the architects of the Clinton administration's Big Emerging Markets policy under Secretary of Commerce Ron Brown. He is now dean of the Yale School of Management. The Clinton policy emerged out of a growing conviction that some ten markets will account for the overwhelming growth potential in world imports, not to mention commensurate growth in economic and political influence around the world. These markets include, in Asia—the Chinese Economic Area (China, Hong Kong and Taiwan), South Korea, Indonesia and India; in Africa—South Africa; in Central Europe—Poland and Turkey; and in Latin America—Mexico, Brazil and Argentina. The administration concluded that, because many of these countries still have important state sectors, and because virtually all are focusing heavily on infrastructure projects that demand the involvement of local governments, U.S. companies need the U.S. government at their side to win a fair hearing. What is more, because of the intensity of foreign competition and the capital demands on these countries, international competitors will be public/private partnerships in which foreign governments provide concessionary financing and aggressive advocacy to support their companies' efforts.This presentation is based on the author's speeches during his tenure as Under Secretary for International Trade of the U.S. Department of Commerce, June 1993 to October 1995.     

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     

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.     

Board generational diversity in emerging markets

To identify the determinants of the generational diversity of board membership in emerging market firms, we conducted an empirical analysis using state-level social inequality indices and data on 14,598 listed/unlisted firms from 20 Eastern European countries and China. We found that, in these emerging markets, social inequality strongly inhibits the generational diversity of board membership, regardless of the gender of board members. The results also reveal that four firm attributes—board size, CEO duality, state ownership, and the presence of foreign investors from non-advanced economies as firm owners—significantly affect the age composition of board directors in line with our expectations. Two other firm attributes—ownership concentration and firm ownership by foreign investors from advanced economies—are also found to have a significant impact on board generational diversity; however, the direction of their impact contradicts our predictions. Supplementary estimations carried out by introducing various sample restrictions produce similar results, thus confirming the statistical robustness of our findings.     

Currency risk in emerging equity markets

The paper develops an international capital asset-pricing model (ICAPM), which includes foreign currency risk, and examines the impact of capital market liberalisation on the pricing of risks. It applies the model to data from Pacific Basin financial markets and finds substantial evidence that not only currency risk is priced in both pre- and post-liberalisation periods, but the model is superior to one which does not include currency risk. This evidence suggests that an international capital asset-pricing model, which omits currency risk, will be misspecified. Furthermore, the results imply that since currency risk is priced and investors are compensated for bearing such risk they should not be discouraged by more flexible exchange rate regimes from investing in emerging markets.     

Private equity exits in emerging markets

Using deal level data from 2733 private equity (PE) deals from 35 emerging markets, we find that PE fund managers have a higher probability of successful exits in countries with better business and legal environments. We also find that they are able to mitigate the potential costs associated with inefficient and corrupt business environments to increase the probability of exits by IPOs in countries with higher levels of corruption. Moreover, we find that market shocks in the developed markets result in a negative ripple effect as the probability of successful exits, especially by way of IPOs, decreases in emerging markets.     

Equity investment prospects in emerging markets

The Mexican debacle in late 1994 had a contagious, if short-lived impact on emerging markets. Evidence suggests that fund managers panicked and withdrew investments. Portfolio equity flows to emerging markets decreased by more than a third in 1995. The investor base shrank. The longterm case for investing in emerging markets is, however, very strong. Most of them are growing faster, some much faster, than developed countries, and are likely to yield higher returns on investment. By one estimate, emerging markets will increase their share of world stock market capitalization from 15 percent in 1995 to 45 percent in 2010. The article will review the trends in private capital flows and prospects for the future, focusing on opportunities in East Asia as an example. The author discusses the investment strategies that help explain the panic of 1995 and proposes a more analytical approach to investment in developed markets and the information needed to facilitate its adoption.     

Investing in Asia's emerging equity markets

Asian equity markets have been hot for some time and they show no dramatic signs of cooling. The economies of the region have moved towards greater economic and financial integration while opening their capital markets to foreigners. Attracted by strong economies, credible reforms and further intentions of liberalization, global investors have made significant investments. However, the stability promised by a financially strong Japan is diminishing, and the region as a whole faces a variety of political and financial challenges.     

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.     

Marketing strategy in emerging markets: a conceptual framework

Citing difference between emerging and developed markets, scholars highlight need for different approaches to marketing in emerging markets. In this paper, we argue that while there are some unique characteristics of emerging markets, all countries within emerging markets do not have similar levels of product penetration and consumption. As a result, it is wrong to assume that emerging markets are untapped and under-served across the product categories. To a list of characteristics identified as unique to emerging markets, we add large population as an important characteristic and discuss its strategic implications. We develop a conceptual framework that factors in combined effect of varying degrees of product penetration & consumption levels with large population of emerging market countries. The conceptual framework identifies four strategic alternatives for marketing in emerging markets. Instead of recommending any generic marketing strategy, we propose that marketers need to choose an appropriate mix of strategies aimed at primary and selective demand creation in emerging markets.     

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.