Why do closed-end country funds trade at enormous premiums during currency crises?

We investigate the response of US traded country fund premiums to currency crises in related foreign (local) markets. Our analysis includes 25 currency crises over the past decade involving 18 funds investing in 12 emerging markets, and 7 funds investing in 6 developed markets. We find that fund premiums and the volatility of the premiums increase dramatically in response to a currency crisis, both for emerging and developed markets funds, and that these effects dissipate slowly over time. Our results show that country fund shares and net asset values (NAVs) have differential risk exposures and that these differences are exacerbated during a crisis. While the NAV returns show sensitivity to changes in the local market index, share returns are sensitive to changes in both local and world market indices. Therefore, in response to a currency crisis, when local stock markets decrease in value, fund NAVs react more strongly than their share prices which have a strong global component. We also show that the high premiums observed during currency crises are not due to the reluctance of investors to trade and realize losses.     

Foreign Investment in Emerging Markets: International Diversification or Familiarity Bias?

This study empirically tests whether foreign investors take advantage of international diversification when investing in emerging Asian markets. Using the 2007–2008 financial crisis as identification, we find that firms with higher foreign ownership had better stock returns during the financial crisis. Moreover, the diversification effect exists in five out of the eight emerging markets and is stronger in markets with a lower dynamic conditional correlation with the global market index. We also find that foreign investors prefer firms with a lower international sales ratio. In conclusion, the evidence consistently suggests that foreign investors take advantage of diversification effects.     

Contagion in financial markets after September 11: myth or reality?

Major global events can lead to a change in the cross‐country correlation of assets. Using stock prices from 25 economies, we test whether the terrorist attack in the United States on September 11, 2001, resulted in a contagion—an increase in correlation across global financial markets. Unlike prior works on contagion, we model the intrinsic heteroskedasticity. Our results indicate that international stock markets, particularly in Europe, responded more closely to U.S. stock market shocks in the three to six months after the crisis than before. Our evidence suggests that the benefits of international diversification in times of crisis are substantially diminished.     

GLOBALIZATION OF CAPITAL MARKETS AND THE ASIAN FINANCIAL CRISIS

This article has three basic aims: (1) to analyze the impact of the opening of their capital markets on the economies of host countries; (2) to investigate the causes of the Asian financial crisis; and (3) to evaluate the likely effects of the South Korean government's recent attempts to restructure its corporate sector. Although the recent Asian financial crisis has led some to question the merits of open capital markets and to call for regulatory restraints on capital flows across international borders, the scientific evidence suggests that the opening of stock markets to foreign investors has been largely beneficial for emerging economies. On average, stock market liberalization has been accompanied by increases in stock prices and reductions in stock return volatility, reductions in inflation, and reductions in the rate of currency depreciation. Much of the blame for the Asian currency crises is assigned to Asian policymakers' futile attempts to defy market forces by trying to maintain their currencies at artificially high levels. But a more fundamental cause of Asia's economic problems has been the widespread value destruction by Asian corporations, which has led to a lower value for the overall economy and weakened the banking sector. The government-directed banking systems and weak corporate governance structures (including managerial incentives to increase size and market share at the expense of shareholders) that characterize most Asian economies have resulted in systematic overinvestment, bloated payrolls, and sharp declines in corporate profitability. While applauding most of the Korean government's recent measures to reform the economy, the article expresses skepticism about the government-mandated restructuring of the chaebol known as the “big deal.” Rather than trying to direct the process of restructuring, Korean policymakers should limit their efforts to improving the market mechanism by increasing competition in the markets for capital, corporate control, and goods and services. The Korean market for corporate control transactions could be greatly improved by increasing the efficiency of bankruptcy proceedings and by allowing hostile takeovers by foreign as well as domestic investors. To increase the productivity of capital, Asian companies should seek to realign managerial with shareholder interests by tying compensation to measures of value creation like EVA.     

The Asian financial crisis: The role of derivative securities trading and foreign investors in Korea

This paper is part of a larger research program pertaining to the role of derivatives during financial crisis and also part of the research pertaining to the causes of the Asian financial crisis. The Korean market is studied because of two reasons: (1) it is an important example of the Asian financial meltdown and (2) there is a detailed data set available of all transactions by different types of protagonists, including foreign investors. The results in this paper indicate that futures markets and trading by foreign investors played a key role during the Korean stock market turbulence in 1997.     

The pricing of foreign exchange risk around the Asian financial crisis: evidence from Taiwan's stock market

The volatile exchange rate movement during the Asian financial crisis has led global investors to re-evaluate the importance of currency exposures in Asian stock markets. In this paper, we examine industry-level currency risk of Taiwan's stock market around the Asian financial crisis. The results show that most export-oriented industries, except for the electronics industry, are positively affected by the depreciation of the New Taiwan Dollars (NTD) against the US Dollars (USD). We also find that the magnitude of currency risk is less for banking and electronics industries in the Taiwan Stock Exchange (TSE) than for those in the over-the-counter (OTC) security exchange. Our results are consistent with the findings of Chow et al. (J. Financial Res. 2 (1997b) 191) and have important implications for international investors with exposures in Taiwan's stock market.     

Risk profiles: how do they change when stock markets collapse?

This paper has two main objectives: the first is to unveil the relative importance of global versus local risk factors in influencing excess returns in the emerging country stock markets; the second is to analyse how the observed risk profiles change when markets undergo a major crisis. Our main country of focus is Mexico, but we also analyse six Asian countries which went through the 1997 Asian crisis. Our findings indicate that during stable periods investors are mainly concerned about global risk factors, whereas close to a crisis they also include local factors in their information sets in forming expectations about future excess returns.     

US and Domestic Market Gains and Asian Investors’ Overconfident Trading Behavior

We find that subsequent to both US and domestic market gains, both Asian individual and institutional investors increase their trading and that this effect is more pronounced in bull markets, in periods of relatively favorable investor sentiment, in periods of extremely high market returns, and in markets with short‐sale constraints. We also find that individual investors trade more in response to market gains than institutional investors. Moreover, we find that further integration of Asian stock markets with US stock markets after the Asian financial crisis in 1998 is an important reason for Asian investors’ response to US market gains.     

A study of cointegration and variance decomposition among national equity indices before and during the period of the Asian financial crisis

This study uses a cointegration and variance decomposition analysis to examine the linkages among the stock markets of 12 Asia–Pacific countries, before and during the period of the Asian financial crisis. Johansen (1988) multivariate cointegration and error-correction tests demonstrate evidence in support of the existence of cointegration relationships among the national stock indices during, but not before, the period of financial crises. In the recent crisis, the relationship within the South-East Asian countries seems to be stronger than that within the North-East Asian countries. The variance decomposition reveals that the ‘degree of exogeneity’ for all indices has been reduced, implying that no countries are ‘exogenous’ to the financial crisis. In addition, Granger’s causality test suggests that the US market still ‘causes’ some Asian countries during the period of crisis, reflecting the US market’s persisting dominant role.     

Did China avoid the ‘Asian flu’? The contagion effect test with dynamic correlation coefficients

Many economists believe that China avoided the so-called Asian flu due to its strong balance of payments position and substantial foreign reserves. This study introduces an improved method for testing financial-crisis contagion and shows that crisis-contagion effects were significant among Thailand and the Chinese economic area (i.e. China, Hong Kong, and Taiwan) stock markets during the Asian financial crisis. The main contribution of this study is its use of a two-step procedure to identify the crisis dates for testing for contagion and data pertaining to a growing triangular economic area during the Asian financial crisis. This result suggests that if investors ignore the economic and financial information within regional markets, they will face an increase in uncertainty vis-à-vis investment returns.     

FOREIGN OWNERSHIP RESTRICTIONS AND MARKET SEGMENTATION IN CHINA'S STOCK MARKETS

We study market segmentation in China's stock markets, in which local firms issue two classes of shares: class A shares available only to Chinese citizens and class B shares available only to foreign citizens. Significant stock price discounts are documented for class B shares. We find that the price difference is primarily due to illiquid B‐share markets. Relatively illiquid B‐share stocks have a higher expected return and are priced lower to compensate investors for increased trading costs. However, between the two classes of shares, B‐share prices tend to move more closely with market fundamentals than do A‐share prices. Therefore, we find A‐share premiums rather than B‐share discounts in China's markets. JEL classification: G15     

The behaviour of asset return and volatility spillovers in Turkey: A tale of two crises

This paper examines return and volatility spillovers between the Turkish stock market with international stock, exchange rate and commodity markets. Our aim is not only to examine spillover behaviour with a large emerging market but also to examine cross—asset spillovers and how they vary across two periods of financial market crisis; the dotcom crash and the liquidity-induced financial crisis. This is to be compared with existing work that typically focuses on industrialised countries or single asset markets only. Using the spillover index methodology we uncover an interesting distinction between these two periods of markets stress. Over the dotcom period spillovers are largely between the same asset class, notably two exchange rate series and two international stock markets series. However, in the period including the financial crisis, spillovers both increase and cross asset types and suggest a much greater degree of market interdependence. Understanding this changing nature in spillovers is key for investors, regulators and academics involved in theoretical model development.     

Liquidity risk and stock performance during the financial crisis

We investigate whether and how ex-ante liquidity risk affects realized stock returns during the global financial crisis of 2008–2009 in international equity markets. We find that stocks with higher pre-crisis return exposure to global market liquidity shocks experience larger price reductions during the crisis period. Our findings provide further insight into the comprehensive picture of the effect of liquidity risk on asset prices, especially in an international context and under different market conditions.     

What drove the mid-2000s explosiveness in alternative energy stock prices? Evidence from U.S., European and global indices

Soaring prices in European alternative energy stocks and their subsequent tumble have attracted attention both from investors and academics. We extend recent research to an international setting and analyze whether the explosive price behavior of the mid-2000s was driven by rising crude oil prices and overall bullish market sentiment. Inflation-adjusted U.S. alternative energy stock prices do not exhibit signs of explosiveness. By contrast, we find strong evidence of explosive price behavior for European and global sector indices, even after controlling for a set of explanatory variables. Interestingly, while the sector indices plunged with the outbreak of the global financial crisis, idiosyncratic components continued to rise and did not start to decline until after world equity markets had already begun to recover in 2009. This finding suggests a substantial revaluation of alternative energy stock prices in light of intensifying sector competition and shrinking sales margins and casts some doubts on the existence of a speculative bubble. Nevertheless, we observe temporary episodes of explosiveness between 2005 and 2007 followed by rapid collapses, indicating the presence of some irrational exuberance among investors.     

El efecto de la volatilidad del peso mexicano en los rendimientos y riesgo de la Bolsa Mexicana de Valores

The effect of heavy tails due to rare events and different levels of asymmetry associated with high volatility clustering in the emerging financial markets requires sophisticated models for statistical modelling of such stylized facts. This article applies extreme value theory (EVT) to quantify tail risk on the daily returns of Mexican stock market under aggregation of foreign exchange rate risk from January 1971 to December 2010. This study focuses on the maximum-block method and generalized extreme value distribution (GEVD) to model the asymptotic behavior of extreme returns in US dollars. The empirical results show that EVT-Based VaR measured at high confidence levels performs better than simulation historical and delta-normal VaR models on capturing fat-tails in the returns of highly volatile stock markets. Additionally, international investors holding long positions in Mexican stock market are more prone to experience larger potential losses than investors with short positions during local currency depreciation and financial crisis periods.     

On market price of risk in Asian capital markets around the Asian flu

This study investigates a contemporaneous relationship between realized market risk premia, and conditional variance and covariance in nine Asian markets and the US. The time period for this study is before, during, and after the Asian financial crisis. A contemporaneous state-dependent capital asset pricing model (CAPM) that allows for negative and positive market prices of variance and covariance risk is investigated. In the light of significant upstate and downstate reward to local and world variance risk for all markets and all periods, we conclude that a market return-generating process is a piecewise function of local and world variance over time. Furthermore, a cross-sectional analysis of upstate and downstate market prices of variance and covariance risk indicates that reward to risk is a mix of reward to local and world variance, depending on the ever-changing correlation with the world market. Our findings are consistent with the one-factor conditional international CAPM.     

信息不对称、过度自信与股价变动

信息传导的非同步和投资者情绪变化是股票市场的两个典型特征,前者会引发投资者之间出现信息不对称问题,后者主要体现为投资者过度自信,两者共同作用影响股票价格变动。本文将信息不对称和投资者过度自信情绪置于同一个分析框架,建立两阶段动态序贯定价理论模型研究现实市场上信息传导过程中股价变动的内在机制。结果表明:(1)面临新信息的进入,投资者对股票收益预期的调整与均衡价格之间具有正相关关系;(2)面临有利消息时,过度自信投资者比例越大,股票的均衡价格越高,投资收益将越低;面临不利消息时则相反;(3)随着过度自信投资者比例以及过度自信程度升高,市场风险溢价将下降;(4)投资者群体在信息传导过程中出现分化,对股价变动形成异质信念,未获取信息和获取信息但未出现过度自信的投资者认为股价被高估,获取信息且出现过度自信的投资者认为价格被低估,促使更多的交易,引发市场成交量和股价变动;(5)过度自信投资者比例与过度自信程度提高均会对市场效率产生正向影响,而对市场深度具有负向效应。最后,基于理论结果对非对称性和持续性等典型的市场波动性特征进行解释。     

International financial integration in Asian bond markets

With the development of international financial market, the degree of international financial integration increased significantly during the late 1980s and 1990s. A key factor underlying this process was the increased globalization of investments seeking a higher rate of return and the opportunity to diversify risk internationally. In this paper, we investigate the degree of international financial integration in Asia by examining the relationships amongst Asian bond markets by employing the advanced econometric technique of cointegration of error correction vectors. In other words, we propose the answers to the following questions. Firstly, what is the degree of international financial integration in Asian bond markets? Secondly, does this degree of integration significantly change after the 1997 Asian financial crisis?This study has a strong implication for investors, in particular, from the perspective of Australian or US investors, whether they do benefit from investing in Asian bond markets. In addition, understanding the extent of financial integration and monitoring its progress in the region is important for Asian central banks. In addition, increased international financial integration promotes financial development and hence enhances economic performance in the region.     

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.     

Crises,contagion and cross-listings

We investigate whether cross-listing shares in the form of depositary receipts in overseas markets benefits investors in emerging market countries during periods of local financial crisis from 1994 to 2002. We regress cumulative abnormal returns for three windows surrounding the crisis events on the cross-listing status while controlling for cross-sectional differences in firm age, trading volume, foreign exposure, disclosure quality and corporate governance. Further, we examine cross-listing effects in countries popularly thought to experience contagious effects of these crises. We find that cross-listed firms react significantly less negatively than non-cross-listed firms, particularly in the aftermath of the crisis. The results on contagious cross-listing effects are however mixed. Our findings are consistent with predictions based on theories of market segmentation as well as differential disclosure/governance between developed and emerging markets. We do not find evidence that foreign investors “panic” during a currency crisis.