Local Stock Market Research Articles

Events that Shook the Market: An Insight from Nonlinear Serial Dependencies in Intraday Returns

The present study proposes the use of nonlinear serial dependencies in the returns series for assessing market responses to new information. Unlike the standard event study methodology, this paper advocates a reserve form that let data analysis to first detect those periods with significant nonlinearity, and then identify whether their occurrences can be associated with major economic or political events. Our proposed research framework involves the application of the Hinich (1996) portmanteau bicorrelation test statistic in a moving time windows setting. Using the Malaysian stock market as a case study, our empirical application is able to detect not only the presence of nonlinear serial dependencies in the KLCI intraday ten-minute returns, but also the time periods when they occurred. The next stage of event-matching managed to identify major events that unsettled the local stock market in all cases except one. In particular, the Russian crisis, the unorthodox capital control measures and the Brazilian crisis are found to be responsible for the short burst of nonlinear behavior. However, the paper noted that factors that shook the market need not be news announcement in the media. It could be due to, among others, rumors, speculations, expectations, or worries prevail in the investment communities.

Stock market development and internationalization: Do economic fundamentals spur both similarly?

Abstract We study how local stock market development and internationalization–listing, trading, and capital raising in international exchanges–are related to economic fundamentals. Using panel data, we find that higher-income economies with sounder macro policies, more efficient legal systems, greater openness, and higher growth opportunities have more developed local markets. Importantly, these fundamentals also relate to internationalization, and actually more so, since the better the fundamentals, the higher the ratio of internationalization to local market activity. Furthermore, we find that greater domestic stock market development is associated with subsequent higher internationalization. These findings are not consistent with firms internationalizing to escape poor domestic environments, but rather with better country fundamentals allowing firms to internationalize and with countries with more developed stock markets experiencing more internationalization. With liquidity agglomeration, better fundamentals might further accelerate internationalization, with potential negative effects on domestic markets, as others have already argued.

Home Bias and Stock Market Development: The Polish Experience

Pension reform has become a major policy issue for both developed and developing countries in recent years. In developing countries the impact of these reforms on the development of their financial markets is critical. However, the initial expectations that pension reforms in developing countries would bring broad benefits and result in faster market development have not materialized. A particular problem has been that governments often impose restrictions on the freedom of pension funds' investment decisions. In particular, they have a tendency to enforce home bias in investment behaviour (e.g., as is the case in Russia and Poland). This paper provides a non-technical introduction to home bias and its role in stock market development, and uses the Polish experience as a case study. It discusses the main arguments for portfolio diversification, the primary side effects that emerge from locking funds into underdeveloped equity markets, and highlights the problems the Polish pension funds face as a result of the home bias policy of the Polish authorities. The findings support the view that enforced home bias has a negative impact on the local stock market development, on the performance of pension reform.

Volatility and correlation in international stock markets and the role of exchange rate fluctuations

This paper develops a direct, explicit model for the role of exchange rate fluctuations in international stock markets and examines how and to what extent volatility and correlations in equity markets are influenced by exchange rate fluctuations. Evidence presented in this paper indicates that a higher foreign exchange rate variability mostly increases local stock market volatility but decreases volatility for the US stock market. The extent to which stock market volatility is influenced by foreign exchange variability is greater for local markets than for the US market, due to the fact that exchange rate changes are more strongly correlated with local equity market returns than the US market returns. We find that a higher exchange rate fluctuation marginally decreases the US/local equity market correlation. While exchange rate fluctuations held a relatively large fraction of the variation in local stock market returns, there was no significant influence on the US/local equity market correlation.

Factors affecting the yields of emerging market issuers: Evidence from the Asia-Pacific region

We investigate the yield spread between the sovereign bonds issued in international markets by major Asia-Pacific issuers (China, Korea, Malaysia, Philippines and Thailand) and matched with near maturity benchmark U.S. Treasury bonds (2, 5, 10 year maturities) to determine the extent that various factors affect changes in credit spreads. The results suggest that the credit spreads of these sovereign bonds tend to be negatively related to changes in interest rates on U.S. benchmark bonds and positively related to changes in the slope of the yield curve. The asset and exchange rate variables were only significant for spreads on Philippine bonds where it was negatively related to changes in the local stock market index, and positively to changes in the exchange rate. The complex dynamics of these processes highlight concerns for portfolio mangers when constructing portfolios of sovereign Asian bonds by aggregating bonds of different credit ratings.

The Contribution of Exchange Rate Fluctuations to Stock Market Volatility and Cross-Market Correlations

This paper develops a direct, explicit model for the contribution of exchange rate fluctuations and examine how and to what extent international stock market volatility and cross-market correlations are influenced by exchange rate fluctuations. Evidence presented in this paper indicates that a higher foreign exchange rate variability contributes mostly to a higher local stock market volatility but to a lower volatility for the US stock market. The extent to which the stock market volatility is influenced by a foreign exchange variability is greater for local markets than for the US market, due to the fact that exchange rate changes are more strongly correlated with the local equity market returns than the US market returns. We also find that a higher exchange rate fluctuation contributes marginally to a lower US/local equity market correlation in most cases. While exchange rate fluctuations held a relatively large fraction of the variation in local stock market returns, there was no significant influence on the US/local market correlation.

Estimating Risk Parameters for Water and Power Utilities in China

This article uses historical share price return performance for benchmark water and power sector utility companies together with local stock market return histories from Chinese stock exchanges to estimate individual company risk parameters and industry sector average beta coefficients. The authors also calculate equity risk premia and the cost of equity for each company using the capital asset pricing model (CAPM). The purpose of these calculations is provide up-to-date information concerning key elements of the weighted average cost of capital (WACC) that is used as a hurdle rate in development funding decisions for utility infrastructure projects in China. While WACC calculations are company specific, in some instances key elements of the WACC may be adapted from other empirical studies that 1) may be out of date, and/or 2) are the next best estimates given the time and resources available to the project financial advisors and consultants. The information provided herein is meant to assist sponsors and project financiers in providing benchmarks and reference points for project-specific calculations. For example, industry or sector-specific betas can be applied in determining the cost of equity for a utility that does not possess market data (and therefore does not have a beta). For these situations, the industry sector beta can be used as a proxy for the utility company9s own beta.

Estimating Risk Parameters for Water and Power Utilities in China

This article uses historical share price return performance for benchmark water and power sector utility companies together with local stock market return histories from Chinese stock exchanges to estimate individual company risk parameters and industry sector average beta coefficients. The authors also calculate equity risk premia and the cost of equity for each company using the capital asset pricing model (CAPM). The purpose of these calculations is provide up-to-date information concerning key elements of the weighted average cost of capital (WACC) that is used as a hurdle rate in development funding decisions for utility infrastructure projects in China. While WACC calculations are company specific, in some instances key elements of the WACC may be adapted from other empirical studies that 1) may be out of date, and/or 2) are the next best estimates given the time and resources available to the project financial advisors and consultants. The information provided herein is meant to assist sponsors and project financiers in providing benchmarks and reference points for project-specific calculations. For example, industry or sector-specific betas can be applied in determining the cost of equity for a utility that does not possess market data (and therefore does not have a beta). For these situations, the industry sector beta can be used as a proxy for the utility company9s own beta.

Controlling the risk: a case study of the Indian liquidity crisis 1990-92

Over the period 1990–92, India experienced a foreign exchange crisis complicated by political turmoil that led to three rapid downgrades of its credit rating within the short space of a year. However, India did not default or reschedule its debt and with the help of foreign exchange loans after 44 years of socialism, proceeded with a structural, market-oriented reform of the economy. This crisis differs from the subsequent crises in Mexico, Asia and Russia that followed later in the 1990s in that it did not spread to other countries. The reaction of the international markets was mild. Net flows of private foreign capital remained positive over the crisis period and the three rating migrations increased the country's cost of borrowing by only 1 per cent. The reaction of domestic markets was also positive and by the end of 1991 the local stock market had started an impressive bull run. Thus, the case of India 1990–92 is an interesting study in macroeconomic crisis management with lessons for the future. The crisis was short, damage to investor confidence was minimal, and a turnaround was achieved within three years. This study attempts to examine the crisis, its handling and reaction of the market to downgradings. Copyright © 2003 John Wiley & Sons, Ltd.

Stock market scale by artificial insymmetrized patterns

Large and stable indices of the worldwide stock markets such as NYSE and S&P500 together with NASDAQ (the index representing markets of new trends) and WIG (the index of the local stock market of Eastern Europe), are considered. Due to the relation between artificial insymmetrized patterns (AIP) and time series, stationary and temporary properties of stock market indices are identified. By filtering extreme events it is found that fluctuations are self-similar. Snap-shots in time lead to estimates for a temporary state of a market with respect to its history. It appears that close to a crash the AIP representation of a system becomes frozen.

Impact of International Cross‐listing on Local Exchanges: Evidence from Chile

This article examines the impact of international cross‐listings on local stock exchanges by focusing on the experience of Chile. First, we analyse the consequences to the domestically traded shares of a sample of Chilean companies that undertook ADR listings. Our findings show that there is no indication of order‐flow migration from the domestic market following cross‐listings. There is, however, evidence that in the aftermath of cross‐listings trading becomes concentrated in the ADR market. There is also some indication of an increase in the base‐level price volatility of the underlying stock series following cross‐listings. Second, we study the changes in Chile's local stock market vis‐à‐vis the ADR market. We observe that the increase in the size and liquidity of the domestic stock exchange is overshadowed by the rapid growth of the ADR market. From a policy perspective, the continued rise in the number of companies undertaking international cross‐listings can cause the local stock markets to become secondary role players relative to the major foreign exchanges, thus affecting domestic financial development.

Privatization, political risk and stock market development in emerging economies

This paper investigates whether privatization in emerging economies has a significant indirect effect on local stock market development through the resolution of political risk. We argue that a sustained privatization program represents a major political test that gradually resolves uncertainty over political commitment to a market-oriented policy as well as to regulatory and private property rights. We present evidence suggesting that progress in privatization is indeed correlated with improvements in perceived political risk. Our analysis further shows that changes in political risk in general tend to have a strong effect on local stock market development and excess returns in emerging economies. We conclude that the resolution of political risk resulting from successful privatization has been an important source for the rapid growth of stock markets in emerging economies.

Real Estate in Global Cities: Singapore and Hong Kong as Property States

Land and buildings form a significant portion of the national wealth in most economies, but in Singapore and Hong Kong, two small city-states where land is scarce, real estate has an important role in the functioning of the whole economy. Transnational property and development companies are important players in Singapore and Hong Kong. They form an important part of the local stock market and have enjoyed considerable growth while providing substantial revenue for governments and wealth for individuals. Because of this important role, the paper redescribes Singapore and Hong Kong as property states, not rent-seeking economies as the term rent is usually used in discussing Asian capitalism. The importance of real estate, an immobile asset, is not only surprising in a global era defined in part by the mobility of capital, but also because in Singapore and Hong Kong land is publicly owned. The paper attempts to explain the anomaly by analysing the land allocation mechanisms in Singapore and Hong Kong. In spite of their similarities, real estate markets in Singapore and Hong Kong exhibit several differences, linked in turn to different policy options for their management.

The Long Run Performance of Shipping Initial Public Offerings

This paper examines for the first time the performance of Initial Public Offerings (IPOs) in the shipping industry for the initial twenty four months of trading in the secondary market. In the analysis, a sample of 27 shipping IPOs issued in the stock exchanges of seven different countries in the period 1987–1995 is used. Aftermarket performance is measured against the local stock market indices of each IPO and against the Morgan Stanley Capital International (MSCI) index for the shipping equity market. The portfolio of shipping IPOs in the sample underperforms the local stock market indices by as much as 36.79% by the end of the second anniversary of public listing, but there is no evidence of underperformance in relation to the MSCI Shipping index. Furthermore, the two year holding period returns of the dataset are found to be positively related to the initial level of gearing and negatively related to the fleet age of the companies at the time of the offering.

Privatization, Political Risk and Stock Market Development in Emerging Economies

This paper investigates whether privatization in emerging economies has a significant indirect effect on local stock market development through the resolution of political risk. We argue that a sustained privatization program represents a major political test which gradually resolves uncertainty over political commitment to a market-oriented policy as well as to regulatory and private property rights. We present evidence suggesting that progress in privatization is correlated with improvements in perceived political risk. These gains tend to be gradual over the privatization period and are significantly larger in privatizing countries than in nonprivatizing countries, suggesting that the resolution of such risk is endogenous to the privatization process. Our analysis shows further that changes in political risk in general tend to have a strong effect on local stock market development and excess returns in emerging economies, suggesting that political risk is a priced factor. We conclude that the resolution of political risk resulting from successful privatization has been an important source for the rapid growth of stock markets in emerging economies.

The Transmission of U.S. Election Cycles to International Stock Returns

This paper examines the international pervasiveness and importance of the previously uncovered four-year U.S. election cycle whereby U.S. stock returns are significantly lower, and negative, in year 2 following U.S. presidential election relative to years 1, 3 and 4. All eighteen countries examined over the 1957 to 1996 time period possess lower local currency stock market capital gains returns in year 2 (−0.66%) relative to the average capital gains of years 1, 3 and 4 (11.68%). These predominately lower year 2 returns are shown to be robust in conditional expected return regressions which include both local macroeconomic variables as well as U.S. macroeconomic, fiscal and monetary policy variables. In addition, we find that the U.S. dollar trends to depreciate more in year 2 of the election cycle. We conclude that the U.S. election cycle variable is either proxying for information variables not included in our model, or the U.S. election cycle variable is capturing some form of U.S. and international market sentiment. That is, the U.S. election cycle may be an important nondiversifiable political factor in the determination of international conditional expected stock returns.

A PRACTICAL APPROACH TO CALCULATING COSTS OF EQUITY FOR INVESTMENTS IN EMERGING MARKETS

While most financial economists argue that multinational corporations (MNCs) should use discount rates that reflect only “systematic” or “covariance” risks when evaluating offshore projects, the managers of most MNCs do not appear to follow this prescription of the CAPM. Instead they favor use of discount rates that reflect the “total risk” of emerging‐market investments (as evidenced, for example, by the comments of the executives in the Roundtable discussion that immediately precedes this article).The authors defend this practice by noting that emerging countries are generally in the midst of profound economic and political transformations; and, although an MNC's shareholders may be willing to accept considerably lower rates of return on emerging‐markets projects because of the expected portfolio diversification benefits, the managements of MNCs are likely to find that using higher discount rates for emerging‐markets investments does a better job of accomplishing what a capital budgeting system is supposed to do—namely, to send strategic planners clear signals of the full extent of project risks and to set high standards of profitability for overseas operating managers.After describing the “total‐risk” focus of corporate planners, the authors present a “practical model” for calculating discount rates for emerging countries that incorporates two dimensions of risk: (1) credit quality, which is intended to capture political or “sovereign” risks; and (2) business volatility, which reflects primarily the commercial risks of operating in a given country. Credit‐quality risk is measured by the credit spread (over U.S. Treasuries) of a country's sovereign debt denominated in dollars or other reserve currency. Business volatility is captured by an additional risk premium that reflects the volatility of the local stock market relative to the volatility of the domestic (U.S.) market. And, because these two sources of risk are not completely independent, the authors propose a downward adjustment to compensate for any “double counting” inherent in the method.

Estimating the time Varying Components of international stock markets' risk

In this study an alternative approach for assessing securities' risk is applied. Various authors have argued that security returns are not homoskedastic but exhibit variation over time. They have observed that large changes tend be followed by more large changes in either direction, and so volatility must be predictably high after large changes. This phenomenon of securities' volatility, referred to as clustering, has important implications for security pricing and risk management. Among the most popular techniques currently used to capture the clustering effect and to forecast future volatilityare those belonging to the family of Autoregressive Conditional Heteroskedastic (ARCH) models. The main aim of this paper is to investigate whether such volatility modelling can be used to capture the time variation not only in the total risk of a security return but also its systematic and unsystematic components. Using weekly local stock market data, the time varying beta with the World Index has been estimated v...

The Influence of Mexican Culture on the Uses of US Management Theory in Mexico

Introduction The recent approval of the North American Free Trade Agreement will draw more foreign companies to Mexico because of the cheaper labour available, high quality work, and close proximity to the US. New investment regulations came into effect in 1989, and Mexico has attracted US$23 billion in foreign investment, two thirds of which has gone into the local stock market, with a much smaller share going into fixed investment in plant and equipment (Moffett, 1992). Mexico is currently enjoying economic growth and attracting even more foreign investments. However, companies currently located in Mexico have obtained mixed results which create reluctance to expand existing projects or to invest further.

Seasonality in the Malaysian stock market

Previous studies have found the existence of a January effect in many Western countries. In Malaysia, local stock market commentators often talk of a Chinese New Year rally which has not been tested. This study examines empirically the existence of seasonality according to the Gregorian, Chinese and Muslim calendars in the Malaysian-stock market. The results suggest that in Malaysia, when monthly returns are measured according to different types of calendar, evidence in support of seasonality is found. In the main, a January effect, Chinese New Year effect and anAidilfitri effect are found. The Muslim calendar time effect is less widespread than the Chinese New Year and January effect. Possible reasons for the existence of the various types of seasonality, both economic and non-economic, are suggested. In a separate part of the study, a Chinese New Year effect is also found in the Singapore and Hong Kong stock markets.