Implications of the Middle East Emerging Markets on International Portfolio Diversification

Solnik’s international portfolio theory suggests more benefits from diversification if investors invest internationally. The literature highlights that diversification benefits are more significant if equity investments from emerging markets are included in international portfolios. Using two different approaches, the advanced econometric techniques and a meta-heuristic optimization algorithm, this study evaluates the potential advantages of international portfolio diversification of Middle Eastern emerging markets. To investigate the long-run linkages and the short-run dynamics of equity markets the study relies on time series techniques of co-integration based on Vector Auto-Regressive framework, Impulse Response Functions and Variance Decompositions. For the optimization objective, Multiple-Fitness Function Genetic Algorithm procedures are applied to compute optimal portfolios based on both symmetric and asymmetric risk measurements and the long and short-run behavior of investments are investigated through the dominance of Efficient Frontiers. The countries included in this study are expanded in five stages. In the first stage, the analysis is done among six Middle Eastern countries. It is expected that the benefits of portfolio diversification among these countries would be significantly lower as compared to a sample extended by adding countries from Middle-East and North-Africa (MENA) and East Asian equity markets. In the stage four, analyses are done by including developed markets represented by the USA, the UK and Japan. Finally in stage five, all the above regions are considered together. The findings indicate that, contrary to expectations, the Middle East markets are not integrated regionally. For the intra-regional investments, the Middle Eastern equity markets provide more portfolio diversification benefits as compared to the emerging and developed equity markets. A vital difference between emerging and developed markets is that developed countries provide the opportunities of selecting the desired investments among a similar set of portfolio risks in both the short and long-term holding periods. However, the efficient frontiers offered by emerging markets do not have this advantage such that the risks of their optimal portfolios are restricted either in long or short-term. For the inter-regional investments, there is evidence that investors from emerging and developed markets gain by diversifying their portfolios with Middle Eastern equity markets. However, in the long-term, the Middle Eastern equities let investors to have a wider set of investment opportunities compared to the short holding period. The findings imply that the Middle East stock markets could be used as a hedge against the risk of oil price shocks especially for oil consuming economies. Despite the fact that Middle Eastern markets do provide opportunity for international diversification, in practice these countries are the smallest recipient of international portfolio inflows among other emerging regions. This implies that there are probably other factors, besides international diversification benefits, such as political instability, weak market micro-structure, and small market capitalization that explain the low inflow of international portfolio capital into these markets. It is crucial to note that international investors prefer to invest in markets that have low transaction costs, high market liquidity, wider choice of available investment instruments, better information dissemination, effective market regulation and trading mechanisms and selective investment restrictions need to be enforced by policy makers to make these markets more attractive for international investors

The behavior of MENA oil and non-oil producing countries in international portfolio optimization

It is well documented in developed economies that portfolio investment across national borders brings benefits of increasing returns and/or reducing risk. Dividing MENA stock markets into two main groups (oil producing and non-oil producing countries), this study examines the potential role of each group in providing diversification benefits for international investors. In addition, the behavior of the long and the short-run Efficient Frontiers (EFs) constructed by each of the sub-groups and the combined MENA markets is explored. Multi-objective international portfolio models are proposed under Mean-Variance and Mean-Lower Partial Moment frameworks, and the Multiple Fitness Function Genetic Algorithm (MFFGA) is used to find the EFs of optimal portfolios. The findings indicate that the stock markets of oil producing countries can be considered as a potential avenue for international portfolio diversification for investors not only from the same countries but also from the other MENA markets. It was also found that international portfolios constructed from the combination of MENA equity markets are more stable compared to the portfolios of sub-group markets. Further, the findings indicate that the behavior of short-term EFs in the MENA region cannot be predicted by the behavior of long-term EFs

The Ability of Support Vector Machine (SVM) in Financial Distress Prediction

Predicting financial distress, which normally happens before bankruptcy, is a challenging phenomenon and a crucial issue in all firms. The importance of data mining tools is well recognized, such that nowadays they are widely used in different financial issues such as, prediction of bankruptcy, financial distress, company's performance prediction, management fraud discovery and credit risk assessment. Using support vector machine and combinations of cash flow components, this research attempts to predict financial distress of companies. Combinations of cash flows, as input variables (data) of the model, are selected based on specific criteria of financial distress. Results reveal that among Kernel functions of the model, polynomial function has the most power of prediction in year of financial distress or one and two years prior to year of distress

Review the influence of cash holding on the debt capacity and providing a new model for determination of debt capacity (Case study Tehran Stock Exchange (TSE) listed companies)

Management of internal financial flexibility depends to the use of cash, debt capacity and their interactions in the face of crisis and external shocks. Debt capacity as one of the decisive factors of internal financial flexibility, refers to amount of debt that companies can make in theirs financing resources without encountering difficulties in repaying debts. Study effective factors on the debt capacity as one component of internal financial flexibility is important for any company, because identification of these factors will leads to improvement business performance and companies can have better reaction in counter of unexpected events and investments opportunities. In this research, we examine the influence of cash holding on the debt capacity in 69 companies listed in Tehran Stock (TSE) during 2003 to2012. Our finding indicates that the level of cash holding is one of the most important factors that can affectthe Company's debt capacity. Therefore cash is one of the main factors in the creation of internal financial flexibility and also has an important role in the determining of debt capacity

Business sustainability performance and corporate financial performance: the mediating role of optimal investment

Purpose: Employing a large sample consisting of 3,701 corporations domiciled in developed and emerging countries, this paper aims to analyze the mediating role of investment efficiency in the association between business sustainability performance and corporate financial performance. Design/methodology/approach: Four different aspects of corporate sustainability offered by the ASSET4 database are used as proxies for business sustainability performance, including economic, corporate governance, social and environmental dimensions. In addition to these aspects, the aggregate measure of business sustainability performance is also employed. In order to test the association between business sustainability and corporate performance via investment efficiency, ordinary least squares, fixed-effect, random-effect and generalized method of moments statistical models were employed. Findings: The results suggest that business sustainability performance is positively associated with corporate financial performance, indicating that sustainable corporations enjoy higher financial performance. Moreover, Sobel, Aroian and Goodman tests confirm that investment efficiency mediates the positive relationship between business sustainability performance and financial performance. Finally, further analyses show that the positive association between sustainability performance and investment efficiency is stronger for those firms headquartered in developed countries than in those located in emerging nations. Originality/value: This paper contributes to the literature by investigating how growth opportunities advance the influence of business sustainability to corporate financial performance using a large sample from 43 countries

A review on international portfolio diversification: the Middle East and North African region

Over the last three decades, international portfolio diversification has been the integral feature of global capital markets. Several potential benefits have been made investors to internationalize the portfolios. In this regards, emerging stock markets have been the subject of a large body of the international finance literature. It has also been more attractive for the practitioners in stock markets. This study provides an overview to the international portfolio diversification theory as well as a review on the evidence on this area. This review particularly focuses on the evidence from the Middle East and North African region; moreover, it suggests theoretical frameworks for further studies