Liberalization should bring market integration with the global capital market & its effects are: Expected return & correlation b/w & EM & world market returns.. MARKET INTEGRATION AND
Trang 1“ EMERGING MARKETS FINANCE ”
1 INTRODUCTION
apply
Market integrations⇒ similar return for identical risk assets irrespective of their domicile
Liberalization should bring market integration with the global capital market & its effects are:
Expected return & correlation b/w & EM & world market returns
2 MARKET INTEGRATION AND LIBERALIZATION
Domestic financial liberalization ⇒ banking sector reforms or even privatization
Financial liberalization ⇒ freely movement (inflows & outflows) of foreign equity investment
When govt announces a liberalization, prices will & size of related to:
or upon announcement of liberalization
foreign ownership immediately)
Liberalization process is macro focus & coincide with other economic policies (e.g
inflation, exchange rate etc)
2.1 The Theory of Market Integration
Liberalization process is complex & degree of market integration is very difficult to measure
may not be binding
The following risks (barriers) are diversifiable & not priced
2.2 Measuring Market Integration
Trang 23 FINANCIAL EFFECTS OF MARKET INTEGRATION
volatile)
Pre-liberalization, returns are upwardly biased (return to integration) & after financial liberalization
Volatility:
Post liberalization⇒ markets may become more informationally efficient, volatility
Pre-liberalization ⇒ may be swings from fundamental values, volatility
In the long run, post-liberalization volatility
3.1 Liberalization and Returns
+ve relation b/w past returns & capital flows & in capital flows raises stock market prices (no agreement whether effect is short term or long term)
portfolios
3.2 Liberalization and Capital Flows
Political risk is a priced risk in EM (lower cost of capital)
3.3 Liberalization and Political Risk
(diversification benefits)
price segmentation)
3.4 Liberalization and Diversification Benefits
much rosier than country by country results, which focus on behavioral biases
3.5 How Well Have Emerging Market Portfolios Done
Trang 3Financial liberalization may affect growth through no of ways:
investment to GDP ratio, economic growth
4 REAL EFFECTS OF FINANCIAL MARKET INTEGRATION
4.1 Why Would Financial Liberalization Affect Economic Growth
& after liberalization & b/w segmented & financially open countries
4.2 Measuring the Liberalization Effect on Economic Growth
4.3 Intensity and Simultaneity Problems in Measuring Real Liberalization Effects
4.3.3 Financial Liberalization and Financial Market Development 4.3.4 Functional Capital Markets
Macro-oriented reforms can be the source of growth but the liberalization effect always remain intact
Capital market imperfections ⇒ diff b/w cost of internal & external capital ⇒ foreigners may demand better corporate governance ⇒ lead to cost of capital
It is possible that the liberalization may be the outcome of
financial development process
4.4 Other Real Effects of Financial Liberalization
Capital Inflows
Macroeconomic stance
Trang 4Literature on contagion has two components:
5 CONTAGION
5.1 Currency Crises and Contagion
Speculative pressures in currency may lead to a crisis &
devaluation Two explanation:
(expansionary fiscal & monetary policies, budget deficit
money growth, wages & prices lead to speculative attack)
the currency that results in a large capital outflow &
currency collapse (currency crisis is unpredictable)
currency crisis
5.1.1 Predictable Currency Crises
Income effect of contagion ⇒ growth & income levels after a crisis, demand from other countries
decompositions (investors that face crisis in one country sell assets in other countries) are other channels by which crisis spread
Regional contagion ⇒ a currency is likely to devalue if a neighboring country has experienced a currency devaluation
5.1.2 Currency Crisis Contagion
Contagion in equity markets ⇒ markets move more closely together during periods of crisis
contagion) Contagion is excess correlation over & above from economic fundamentals forecast
Contagion can also be linked to liquidity & financial frictions
5.2 Contagion and Equity Markets
Trang 5Cross-section variation in legal institutions in EM affects the returns on equity
agency problems
shareholder value
6 OTHER IMPORTANT ISSUES
6.1 Corporate Finance
of more equity data)
equities
sovereign spread
6.2 Fixed Income
Prices discovery ⇒ no investor can manipulate prices in her favor
Liquidity ⇒ low transaction costs
is required
very little
6.3 Market Microstructure
Information asymmetry problem in EM ⇒ stocks selection is complex
6.4 Stock Selection
Privatization ⇒ to productivity of state-owned economic enterprises & govt budget deficit
6.5 Privatization