Degree Of Financial Liberalization Research Articles

Financial liberalization and the behavior of reversals in emerging market economies

PurposeThis paper investigates the behavior of contrarian strategy payoffs under varying degrees of financial liberalization in the context of Asia-Pacific emerging market namely China, India, Indonesia, Korea, Malaysia, Pakistan, Philippines and Thailand for the period 1997–2017. These markets represent economies that display a gradual change in the degree of financial liberalization instead of fully opening their markets to foreign investors at once.Design/methodology/approachUsing a daily dataset of 2,468 firms and four different measures of the degree of financial liberalization, the paper employs portfolio formation, panel regressions and binary modeling methods to reveal the impact of partial and complete financial liberalization on contrarian returns.FindingsThis paper documents a negative relationship between the degree of financial liberalization and contrarian strategy payoffs. The results further indicate that small-sized emerging markets reveal more significant and higher contrarian returns as compared to their larger counterparts. Moreover, the returns are significantly higher during negative market states, higher volatility and crises periods. The study findings are consistent with the investor-base broadening hypothesis.Practical implicationsThe findings may serve as a useful input for investors and fund managers to devise contrarian investment strategies in emerging market economies. Together, the study provides additional insights for policymakers in managing financial liberalization and integration policies within their respective countries.Originality/valueThis study provides a novel viewpoint by examining the relationship between the degree of financial liberalization and contrarian strategy payoffs. The authors contribute to the existing debate by shifting the discussion to the investor-based broadening argument in which small and less liberalized emerging markets offer opportunities for investors and fund managers to produce abnormal contrarian returns that cannot be earned by other conventional investment strategies.

An application of minimal spanning trees and hierarchical trees to the study of Latin American exchange rates

This paper analyzes a group of nine Latin American currencies with the aim of identifying clusters of exchange rates with similar co-movements. In this work the study of currency relationships is formulated as a network problem, where each currency is represented as a node and the relationship between each pair of currencies as a link. The paper combines two methods, Symbolic Time Series Analysis (STSA) and a clustering method based on the Minimal Spanning Tree (MST), from which we obtain a Hierarchical Tree (HT). Symbolic Time Series Analysis consists in the transformation of a given time series into a symbolic sequence with the aim of identifying patterns in the set of data. The Minimal Spanning Tree condenses the core information on the global structure of the network and its main advantage is that it greatly simplifies comparisons by dramatically reducing the number of elements that must be compared. We identify two main clusters in the currency network, as well as specific currencies that function as transmission channels between clusters. Using data regarding the degree of financial liberalization, as well as the distinction between inflation targeting (IT) and non-IT countries, the analysis suggests that the obtained taxonomy is economically relevant.

Financial Liberalization Index of Tunisia: Factorial Method Approach

The objective of this paper is to construct an index of financial liberalization for Tunisia using the Principal Component Analysis method over a period of 33 years from 1980 to 2012. The index indicates the degree of financial liberalization at any given time. This index is especially useful to control the pace of liberalization and evaluation of the effect of this policy on economic aggregates. This paper also includes partial measures of liberalization index. The constructed index shows that the process of financial liberalization in Tunisia is accelerated with the introduction of the structural adjustment program, during the period 1987 to 1994.

Financial liberalization, deposit insurance and bank stability

This article investigates the impact of implementing an explicit deposit insurance scheme on the likelihood of banking crisis in countries with well-liberalized financial systems. We estimate the probability of a systemic banking crisis using a multivariate logit model in which alternative variables capturing the nature of the deposit protection arrangement enter as explanatory variables along with a set of control variables. We conclude that deposit insurance will be successful in alleviating moral hazard and increase the stability of the financial system only if a sufficient degree of financial liberalization exists.

The impact of financial liberalization on macroeconomic dynamics: A two-country analysis

This paper evaluates and compares the changing macroeconomic dynamics of two emerging countries, Turkey and India which contrast in terms of their degree of financial liberalization. It uses block exogeneity test (multivariate Granger-causality test) to examine whether the interrelations among the domestic variables alter and the international interdependence increases following the initiation of liberalization reforms. Results suggest that there is an increased interdependence among the fundamentals changing the transmission mechanism of monetary policy as the countries move towards financial liberalization process. There is also evidence on the increasing impact of foreign economies on Turkey’s and India’s macroeconomic variables while the long-run equilibrium relation between domestic and foreign variables is stronger for Turkey which is the fully liberalized case of the study.