The Impact of the U.S. and the Japanese Equity Markets on the Emerging Asia-Pacific Equity Markets

Using a tri-variate vector autoregression model, we study the relationships between the four Asian emerging equity markets: Hong Kong, Korea, Singapore and Taiwan, and the two largest equity markets in the world: U.S. and Japan. We find that while most of the unexpected variations in stock returns in these Asian emerging markets is explained by domestic own shocks, the impacts from the U.S. and Japan are larger in Hong Kong and Singapore than in Korea and Taiwan. This foreign effect is pronounced after the Crash of the October 1987, especially in Singapore. This revised version was published online in August 2006 with corrections to the Cover Date.     

U.S. International Equity Investment

Using a comprehensive data set of all U.S. investment in foreign equities, we find that the single most important determinant of the amount of U.S. investment a foreign firm receives is whether the firm cross‐lists on a U.S. exchange. Correcting for selection biases, cross‐listing leads to a doubling (or more) in U.S. investment, an impact greater than all other factors combined. Much of this increased U.S. investment is purchased in the foreign market, implying that the cross‐listing effect reflects something more fundamental about a firm than easier acquisition of its securities. We also demonstrate that cross‐listing is an important determinant of U.S. international investment at the country level and describe easy‐to‐implement methods for including a cross‐listing variable as an endogenous control.     

Globalization and Investment Opportunities: A Cointegration Study of Arab,U.S., and Emerging Stock Markets

Using a sample of Arab, U.S., and emerging stock markets from 1997 to 2002, this study is designed to determine if international diversification is still possible despite growing globalization and the consequent integration among various stock markets. Our results show that within Arab markets, Kuwait cointegrates individually with Jordan, Tunisia, and Saudi Arabia and between Tunisia and Jordan, thus offering investors possible continued diversification opportunities. On the other hand, only Jordan, Kuwait, and Morocco are cointegrated with the U.S. general market index, implying that these markets offer a probable substitute for those investing in the U.S. markets.     

Market Integration and Investment Barriers in Emerging Equity Markets

This article develops a return-based measure of market integrationfor nineteen emerging equity markets. It then examines the relationbetween that measure, other return characteristics, and broadlydefined investment barriers. Although the analysis is exploratory,some clear conclusions emerge. First, global factors accountfor a small fraction of the time variation in expected returnsin most markets, and global predictability has declined overtime Second, the emerging markets exhibit differing degreesof market integration with the U.S. market, and the differencesare not necessarily associated with direct barriers to investment.Third, the most important de facto barriers to global equity-marketintegration are poor credit ratings, high and variable inflation,exchange rate controls, the lack of a high-quality regulatoryand accounting framework, the lack of sufficient country fundsor cross-listed securities, and the limited size of some stockmarkets.     

Intraday Price Formation in U.S. Equity Index Markets

The market for U.S. equity indexes presently comprises floor‐traded index futures contracts, exchange‐traded funds (ETFs), electronically traded, small‐denomination futures contracts (E‐minis), and sector ETFs that decompose the S&P 500 index into component industry portfolios. This paper empirically investigates price discovery in this environment. For the S&P 500 and Nasdaq‐100 indexes, most of the price discovery occurs in the E‐mini market. For the S&P 400 MidCap index, price discovery is shared between the regular futures contract and the ETF. The S&P 500 ETF contributes markedly to price discovery in the sector ETFs, but there are only minor effects in the reverse direction.     

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.     

Equity Market Liberalization in Emerging Markets

Equity market liberalizations, if effective, lead to important changes in both the financial and real sectors as the economy becomes integrated into world capital markets. The study of market integration is complicated because one can liberalize in many ways and many countries have taken different routes. To study the effectiveness of particular liberalization policies, the sequencing of liberalizations, and the impact on the real economy, systematic methods must be developed to date the liberalization of emerging equity markets. We provide a synthesis of the current methods and show the impact of liberalization on the real sector.     

Global Integration in Primary Equity Markets: The Role of U.S. Banks and U.S. Investors

We examine the costs and benefits of the global integrationof initial public offering (IPO) markets associated with thediffusion of U.S. underwriting methods in the 1990s. Bookbuildingis becoming increasingly popular outside the United States andtypically costs twice as much as a fixed-price offer. However,on its own, bookbuilding only leads to lower underpricing whenconducted by U.S. banks and/or targeted at U.S. investors. Formost issuers, the gains associated with lower underpricing outweighedthe additional costs associated with hiring U.S. banks or marketingin the United States. This suggests a quality/price trade-offcontrasting with the findings of Chen and Ritter, particularlysince non-U.S. issuers raising US$20 million–US$80 millionalso typically pay a 7% spread when U.S. banks and investorsare involved.     

Contemporaneous Spillover Effects between the U.S. and the U.K. Equity Markets

We use high frequency data and the “identification through heteroskedasticity” approach of Rigobon (2003) to capture the contemporaneous volatility spillover effects between the U.S. and U.K. equity markets. We demonstrate the relevance of taking into account the information present during simultaneous trading hours by comparing the results generated by our structural vector autoregression with those of a traditional reduced-form vector autoregression. Our findings clearly demonstrate that contemporaneous relations matter and that ignoring them leads to inappropriate conclusions regarding the magnitude and direction of volatility spillover.     

Return Behavior in Emerging Stock Markets

This article investigates the behavior of stock returns in thetwenty stock markets represented in the International FinanceCorporation's Emerging Markets Data Base. The aim is to testfor return anomalies and predictability. Using statistical methodologiesthat have identified seasonal and size-based return differences,as well as general return predictability in industrial markets,we find that these emerging markets display few of the sameanomalies. In particular, we find limited evidence of turn-of-the-tax-yeareffects and small-firm effects. We do find, however, evidenceof return predictability.     

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.     

The Intertemporal Relation Between the U.S. and Japanese Stock Markets

This paper finds a high correlation between the open to close returns for U.S. stocks in the previous trading day and the Japanese equity market performance in the current period. In contrast, the Japanese market has only a small impact on the U.S. return in the current period. High correlations among open to close returns are a violation of the efficient market hypothesis; however, in trading simulations, the excess profits in Japan vanish when transactions costs and transfer taxes are included.     

The Reversing Weekend Effect: Evidence from the U.S. Equity Markets

The well-known weekend effect has been reversing in Major U.S. indices from late 1980s to late 1990s. The correlation between Monday and Friday returns also exhibited a declining trend, and fluctuated around zero in the 1990s. A power ratio method is developed to measure consistently the relative contribution of Friday and Monday returns to the return of the week in each individual year. The revealed dynamics of the anomaly explains why previous researchers report different or conflicting findings. The anomaly may not be necessarily related to firm size.     

Spillover and Cojumps Between the U.S. and Chinese Stock Markets

There is an urgent need to understand the spillover and cojump effects between the U.S. and Chinese stock markets. The paper finds that since July 2005, the U.S. stock market has caused short-run spillover effects on returns on the Chinese stock market. More specifically, price changes in the United States can be used to predict both closing-to-opening and closing-to-closing returns on the Chinese stock market on the next day. However, there is no significant volatility spillover between the two markets. Both markets have shown stronger cojump behavior since the subprime crisis. The return relationships between the two stock markets are robust.     

Long-Run Diversification Potential in Emerging Stock Markets

In this paper we use cointegration tests to examine the long-run diversification potential of 13 emerging capital markets. The Johansen [18] and Johansen and Juselius [19] cointegration procedures are applied to the U.S. and 13 emerging capital markets in three geographical regions of the world. None of the three regions examined possesses cointegrated markets. The lack of cointegration indicates that the correlation between returns from each market is independent of the investment horizon Return correlations using weekly data correspond to the long-run investment horizon correlation. Correlations among the returns from these countries are low on average and occasionally negative. The apparent independence of markets within these three emerging regions suggests that diversification across these countries is effective.     

The Risk Exposure of Emerging Equity Markets

The low correlation between returns in emerging equity marketsand industrial equity markets implies that the global investorwould benefit from diversification in emerging markets. Thisarticle explores the sensitivity of the emerging-market returnsto measures of global economic risk. When these traditionalmeasures of risk are used, the emerging markets have littleor no sensitivity. This finding is consistent with these markets'being segmented from world capital markets. However, the correlationbetween the emerging-market returns and the risk factors appearsto be changing over time.     

Taking the Long Way Home: U.S. Tax Evasion and Offshore Investments in U.S. Equity and Debt Markets

We empirically investigate one form of illegal investor‐level tax evasion and its effect on foreign portfolio investment. In particular, we examine a form of round‐tripping tax evasion in which U.S. individuals hide funds in entities located in offshore tax havens and then invest those funds in U.S. securities markets. Employing Becker's ( 1968 ) economic theory of crime, we identify the tax evasion component by examining how foreign portfolio investment varies with changes in the incentives to evade and the risks of detection. To our knowledge, this is the first empirical evidence of investor‐level tax evasion affecting cross‐border equity and debt investment.     

Home Bias in Emerging Bond and Stock Markets

In this paper, we empirically examine sizes and sources of home bias in both bond and equity markets for twenty emerging countries and twenty-two developed countries over the 2001-11 sample period. The average size of home bias in both bond and stock markets is found to be much larger in emerging countries than in developed countries. Using the explanatory variables in two categories of economic development and market performance, we employ dynamic panel data regression models to analyze major sources of home bias. The main results are the following: First, market performance factors generally affect home bias more strongly than do economic development factors. Second, market factors including market return, volatility, and liquidity support various hypotheses under informational asymmetries, such as return chasing, risk aversion, and flight to quality. Third, among macroeconomic factors, it is shown that real gross domestic product growth has negative effects and country leverage has positive effects on a specific home bias, backing up the size-bias and the flight-to-quality hypotheses, respectively. Finally, and perhaps most important in this paper, the effect of bond market performance on equity home bias is found to be significantly stronger than the effect of equity market performance on bond home bias from the market interaction model estimation, suggesting that a policy design needs to begin with increasing bond market efficiency to reduce equity market home bias.     

Emerging Stock Markets and International Asset Pricing

This article investigates whether emerging stock markets arenow part of the global financial market and characterizes returnbehavior in these markets. Tests of the conditional InternationalCapital Asset Pricing Model (ICAPM) reveal that eighteen ofthe twenty largest emerging markets were integrated with theworld market between December 1984 and December 1991, but thatmany of the same markets reject the model when data for 1977–84are used. These results suggest that large capital inflows fromindustrial economies, beginning in the late 1980s, caused pricesin emerging markets to reflect covariance risk with the worldportfolio, thus inducing their consistency with the ICAPM.     

Financial Shocks and Corporate Investment in Emerging Markets

We examine how cross-firm and cross-country heterogeneity shapes the responses of corporate investment in emerging markets to changes in U.S. monetary policy and financial-market volatility, the latter proxying for uncertainty. We find that in response to increases in U.S monetary policy rates or financial-market volatility, financially weaker firms reduce investment by more than financially strong firms. We also show that firms with stronger balance sheets delay investment voluntarily when faced with higher uncertainty. Finally, we find that stronger macroeconomic fundamentals (lower public debt or higher international reserves) help to buffer corporate investment from increases in U.S. monetary policy rates.