Date post: | 24-Dec-2015 |
Category: |
Documents |
Upload: | poppy-craig |
View: | 215 times |
Download: | 0 times |
Yale School of Management
1
Emerging Financial Markets Lecture 2: Market Overview
Topics for today:
• Trading and return characteristics
•Ownership limits for foreign investors
•Accounting issues
•Liquidity issues and trading costs
•Short-sale constraints
Yale School of Management
23
•The IFC Definition: Income less than $9,000
•20% GDP, 80% Population, 72% Area, And 16%
Market Capitalization in the World (2003)
•Higher growth rates & high avg returns in many
countries
•Time Taken to Double Per capita Output (10 years
but unstable)
What is an Emerging Market?
Yale School of Management
3
The Emerging Markets
0
2
4
6
8
10
12
14
16
US UK
Germ
any
Franc
e
Japa
n
Russia
Argenti
na
Brazil
Mex
ico India
South
Afri
ca
China
0
5
10
15
20
25
30
0
5
10
15
20
25
US UK
Germ
any
Franc
e
Japa
n
Russia
Argenti
na
Brazil
Mex
ico India
South
Afri
ca
China
1913
2000
Integration Index =Country’s share in world Invesment stocks
Country’s share in World GDP
Share of world GDP (in ppp, Share of world GDP (in ppp, 1990 international dollars)1990 international dollars)
Share of international investment Share of international investment stocks in 1913 and 2000stocks in 1913 and 2000
Integration IndexIntegration Index
Yale School of Management
4
Financial Markets also emerge, submerge and re-emerge
Argentina’s stock market:
Founded in 1872Submerged in 1965Re-emerged in 1975
Peru: 1941-52, 57-77, 88-
Yale School of Management
5
Table. PRODUCTIVITY GROWTH
Time Taken to Double Per-capita Output (Selected periods)
Country Period Years
China 1977-1987 10
South korea 1966-1977 11
Brazil 1961-1979 19
Turkey 1857-1877 20
Japan 1855-1919 34
U.S. 1839-1886 48
U.K. 1780-1838 59
Sources: For U.K., Crafts 1981; for Japan, Moddison, for others, World Bank data
Yale School of Management
6
Average Annual Returns for theTwelve Years Ended December 2006Source: International Finance Corporation. Returns include capital gains and dividends.
-0.80%
2.50%
3.40%
8.80%
9.80%
10.20%
10.40%
11.60%
17.80%
22.50%
24.10%
-5.0% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0%
Taiwan
Malaysia
Singapore
Hong Kong
US
Chile
China
Argentina
India
Brazil
Mexico
Yale School of Management
7
Major Emerging Equity Markets
Rank MKt MCP Rank Mkt TVol Rank Mkt Nlist
1 US 11.3 1 US 10.2 1 US 8851
10 HK 0.41 2 TW 1.2 2 IN 5843
13 TW 0.28 7 HK 0.48 7 SL 872
15 BR 0.25 10 CH 0.37 8 PK 781
16 SA 0.23 14 BR 0.20 9 KO 776
Note: MKT-market Value, Tvol-Trading Volume, Nlist-Number of listed companies
Yale School of Management
86
Various Forms of Capital Controls
Foreign ownership limits are often
imposed in EM.
Different class of shares and their
pricing: shares for foreign investors
may sell at a discount or premium to
domestic shares.
Yale School of Management
9
Eun & Jarakiramannan (1986)
Yale School of ManagementNumber of expropriations of foreign assets in different countries: development leading to new
globalization
10DATA SOURCE: Michael Minor, “The demises of expropriation as an instrument of LDC policy, 1980-1992”, Journal of International Business Studies, 1994, pp. 177-188.
Yale School of Management
Number of countries expropriating foreign assets
11DATA SOURCE: Michael Minor, “The demises of expropriation as an instrument of LDC policy, 1980-1992”, Journal of International Business Studies, 1994, pp. 177-188.
Yale School of Management
12
Harvey & Roper (1999)
Yale School of Management
13
Harvey & Roper (1999)
Yale School of Management
14
Harvey & Roper (1999)
Yale School of Management
15
Example: Mexico (Domowitz, Glen and Madhavan (1997)
Yale School of Management
16
Mexico: for financial firms
Yale School of Management
17
Yale School of Management
186
One Stock, Two Prices
FROM 1-1-99 TO 1-17-01 WEEKLY INDEXED
J F M A M J J A S O N D J F M A M J J A S O N D J50
100
150
200
250
300
350
400
450
500
550
600
TAIWAN SEMICON.SPN.ADR 1 ADR = 5 SHARESTAIWAN SEMICON.MNFG.
HIGH 580.42 2-4-00 LOW 100.00 1-1-99 LAST 248.34HIGH 379.39 2-11-00 LOW 100.00 1-1-99 LAST 208.44Source: DATASTREAM
Yale School of Management
19
Accounting issues
Poor financial accounting: hard to
value assets
Are accountings numbers useless?
9
Yale School of Management
20
Table 1: Original Balance Sheets
Company A Company BCash: 100 Cash: 100Real Asset: 100 Equity: 200 Real Asset: 100 Equity: 200Shares Outstanding :200 Shares Outstanding :200Book Value per share: 1.00 Book Value per share: 1.00
Table 2: Balance Sheet when A Buys 100 of B's stock
Company A Company BCash: 0 Cash: 200Real Asset: 100 Equity: 200 Real Asset: 100 Equity: 300Investment: 100Shares Outstanding :200 Shares Outstanding :300Book Value per share: 1.00 Book Value per share: 1.00
How do you handle cross-holding of shares?
Yale School of Management
21
Table 3: Balance Sheet with 200 in Total Cross Holdings
Company A Company BCash: 100 Cash: 100Real Asset: 100 Equity: 300 Real Asset: 100 Equity: 300Investment: 100 Investment: 100Shares Outstanding: 300 Shares Outstanding: 300Book Value per share: 1.00 Book Value per share: 1.00
Table 4: Balance Sheet with 3600 in Total Cross Holdings
Company A Company BCash: 100 Cash: 100Real Asset: 100 Equity: 2000 Real Asset: 100 Equity: 2000Investment: 1800 Investment: 1800Shares Outstanding: 2000 Shares Outstanding: 2000Book Value per share: 1.00 Book Value per share: 1.00
Yale School of Management
222
Measuring Emerging Market Returns
Local currency returns vs. dollar returns
Arithmetic, geometric, and internal rates of returnGeometric means are always smaller or equal to arithmetic means.If one compounds geometric mean returns, one will always get the actual return during the sample period.
One should use geometric returns in emerging markets due to high volatility.
Yale School of Management
23
Emerging Market Return Distribution
High Serial Correlations in Short-run. (Basis for Momentum strategies)
Long-term Mean Reversion for many EMs. (Basis for Value strategies)
Excess Skewness and Kurtosis (Fat Tails, high probability for large surprises)Conventional Derivatives Pricing Tends to Under-price in Emerging Markets Due to Excess Kurtosis.
Yale School of Management
24
Yale School of Management
25
Yale School of Management
26
Summary Statistics-April 1991 - March 1996
Country Start DateArithemetic
ReturnGeometric
ReturnStandarddeviation Skewness Kurtosis
NomalityTest
P-value
FirstOrder
Autocorrel
BetaMSCIWorld
BetaMSCI
AC World
BetaIFCG
CompositeArgentina Apr-91 35.5% 25.6% 56.7% 3.09 16.92 0.00 0.06 1.53 1.69 0.91Brazil Apr-91 44.3% 37.1% 52.2% 0.89 1.51 0.00 0.09 1.19 1.43 1.38Chile Apr-91 24.7% 23.6% 26.6% 0.35 -0.43 0.04 0.23 0.09 0.20 0.64Colombia Apr-91 40.5% 39.0% 40.1% 1.33 2.02 0.00 0.54 -0.05 -0.01 0.25Greece Apr-91 -2.7% -5.5% 24.1% -0.34 0.06 0.32 0.16 0.52 0.54 0.28India Apr-91 12.6% 6.3% 36.8% 0.67 1.47 0.20 0.25 -0.60 -0.49 0.69Indonesia Apr-91 9.5% 5.5% 29.2% 0.15 0.09 0.83 0.18 0.58 0.72 1.04Jordan Apr-91 10.0% 9.4% 14.3% 0.34 -0.80 0.00 0.07 0.11 0.13 0.11Malaysia Apr-91 20.4% 19.1% 23.9% -0.06 1.03 0.26 -0.16 0.57 0.67 0.87Mexico Apr-91 15.7% 8.5% 37.5% -1.01 2.04 0.09 0.33 0.83 1.08 1.40Nigeria Apr-91 37.5% 12.7% 69.5% 1.19 11.92 0.00 -0.04 1.15 1.14 -0.05Pakistan Apr-91 22.4% 18.1% 35.3% 1.03 1.92 0.01 0.30 0.06 0.15 0.57Philippines Apr-91 24.1% 22.4% 28.7% 1.37 4.47 0.18 0.02 0.54 0.69 1.10Portugal Apr-91 8.3% 6.6% 19.6% 0.41 1.55 0.29 0.01 0.98 1.01 0.25S. Korea Apr-91 7.8% 4.7% 26.0% 1.07 1.75 0.03 0.04 0.41 0.51 0.68Taiwan Apr-91 7.3% 1.4% 37.1% 2.24 7.65 0.00 0.08 0.69 0.88 1.42Thailand Apr-91 20.1% 17.2% 30.0% 1.08 1.85 0.03 0.03 0.20 0.35 1.14Turkey Apr-91 13.6% -3.9% 61.2% 0.64 0.42 0.04 0.08 -0.12 -0.01 0.87Venezuela Apr-91 -7.0% -16.8% 45.8% -0.45 1.91 0.24 -0.25 0.45 0.54 0.57Zimbabwe Apr-91 4.8% -1.1% 34.9% 0.38 0.87 0.37 0.32 0.84 0.90 0.55MSCI World Apr-91 11.2% 11.1% 10.7% -0.32 -0.34 0.08 -0.25 1.00 1.01 0.20MSCI AC W’d Apr-91 11.0% 11.0% 10.5% -0.23 -0.39 0.14 -0.22 0.98 1.00 0.25IFCG Comp. Apr-91 11.4% 10.6% 16.4% 0.93 3.47 0.08 0.40 0.47 0.62 1.00*Composite: IFC Global Composite; AC World: MSCI All Country Index. Source: IFC Global Indices, MSCI Indices. Monthly returns in US Dollars.Source: Erb, Harvey and Viskanta
Yale School of Management
27
Yale School of Management
28
Yale School of Management
29
Crises tend to occur often in EM
Yale School of Management
30
TAIWAN SE WEIGHTED - PRICE INDEXFROM 1-1-87 TO 1-22-01 MONTHLY
87 88 89 90 91 92 93 94 95 96 97 98 99 00 01
000'S
0
2
4
6
8
10
12
14
Source: DATASTREAM
Speculations in EM lead to more frequent crises
Yale School of Management
31
FROM 1-4-88 TO 3-31-99 MONTHLY
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 19990
10
20
30
40
50
60
70
80
90
TAIWAN-DS MARKET - DIVIDEND YIELDTAIWAN-DS MARKET - PER
HIGH 2.31 10-4-90 LOW 0.42 9-2-88 LAST 1.59HIGH 87.5 9-2-88 LOW 16.0 10-4-90 LAST 19.6 Source: DATASTREAM
PE and Dividend Yield in Taiwan
Yale School of Management
32
The Nature of Market Return Volatility
International Volatility Comparison: EM Could Be 10 Times
More Volatile.
Correlation of Market Volatilities (The “Asian flu”: market
volatilities tend to increase at the same time.)
A Simple Model of Average Volatility:positively Related to
GDP Growth, Negatively Related to IICCR.
Systematic Risk: Positively Related to GDP Growth. 3
Yale School of Management
33
Time-varying Volatility: Indonesia as an example (S.D. of Monthly Dollar Returns)
Indonesia
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
18.0%
94 95 96 97
Vo
lati
lity
Indonesia
Yale School of Management
34
Volatility Contagion (S.D. of Monthly Dollar Returns)
9495
96
97
Indonesia
Korea
Brazil
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
Indonesia
Korea
Brazil
Yale School of Management
35
Very Weak Relationship Between Beta (EM & world) and Mean Returns (volatilities do better): caution on CAPM
7
Regression Of Returns On Country Variables
Var Coef t-Stat
Constant 0.009 0.068
Freedom
Index
0.004 0.106
GDP
Growth(%)
0.008 1.180
Rule of Law 0.026 2.240
IICCR -0.003 -1.507
EM Beta 0.016 0.431
World Beta 0.025 0.614
Volatility 0.718 1.868
R2(adjusted) 0.157
Yale School of Management
36
Trading and Liquidity Issues in EM
High transaction costs: over 5% for a round trip.
Many trades may fail to settle.
Illiquidity: cannot sell your position without taking substantial price cut.
Front-running: you may be ripped off. 7
Yale School of Management
37
Average Number of Days Taken to Collect Dividend, 1995(Source: Global Securities Consulting Services, Ltd.)
34.2
16.214.8
6.55.3
4.5
2.5 2.11 0.7
0
5
10
15
20
25
30
35
40
Philippines India Venezuela Argentina Brazil Thailand Korea UK UnitedStates
Germany
Yale School of Management
38
Cost of a Round Trip -- Purchase andLater Sale of an Individual Stock
Bid/Offer Country Commission Stamp Taxes Spread Total
Argentina 1.00% 0.48% 1.25% 2.73%
Brazil 1.00 0.14 2.48 3.62
Indonesia 1.30 0.30 1.50 3.10
Korea 0.80 0.50 2.25 3.55
Malaysia 1.20 0.10 1.09 2.39
Thailand 1.30 - 1.89 3.19
Germany 0.50 - 0.49 0.99
Japan 0.40 0.30 0.75 1.45
United States 0.13 - 0.27 0.40
Source: Morgan Stanley International Portfolio Desk and Authors'Estimates.
Yale School of Management
39
Other Trading Costs? (Plexus Group’s findings for U.S.)
Yale School of Management
40
In addition to liquidity issues,
Short-sales may not be allowed in EMs