On the functioning and the efficiency of the emerging equity markets

This thesis was submitted for the degree of Doctor of Philosophy and awarded by Brunel University.In the present thesis a series of theoretical and empirical issues relating to the functioning and the efficiency of the emerging equity markets is investigated. The sample covers ten markets; four from the Latin America and six from the Asia, Asia- Pacific, for the period between 1976 to 1994. In particular, I investigate various aspects of the behavior of equity prices in emerging markets, focusing on whether financial markets in the emerging economies are efficient [as in Fama (1970b)] or exhibit seasonal patterns; whether they move together over time and any subsequent implications this long-run comovement may have for international portfolio diversification; how volatility in these markets behaves and whether there are volatility spill overs from one market to another; whether financial liberalization has increased or decreased equity market volatility; what factors are important in determining equity returns in emerging economies. The main results that emerge from the analysis suggest that prices in the markets of the sample do not follow Random Walks and exhibit seasonal patterns, such as the well known Monday-effect. Furthermore, common long-run trends were detected within regions, however, more detailed analysis suggested that benefits to international portfolio diversification are not eradicated in the long-run. Also, a meteor shower effect, i.e. volatility spill-overs, was detected for most markets

Stock and credit market expansion and economic development in emerging markets: further evidence utilizing cointegration analysis

This paper empirically investigates the relationship between equity and credit market development and economic growth, in a sample of five very important ‘emerging’ markets. In particular, employing a multivariate time-series methodology to test for long-run trends and causality between variables that proxy for stock market development, credit market development and economic development. The results seem to suggest that equity markets have a role to play only in relatively liberalized economies, like Chile and Mexico. In financially repressed economies, like India, the equity market does not affect real sector growth. Furthermore, the banking crises in the 1980s and 1990s in Chile and Mexico resulted in a negative relation between economic growth and the credit market. In South Korea, equity and credit markets both affect economic growth, but not vice versa. In countries where the nature of the stock market has been speculative, like Taiwan, a negative relationship is detected between equity market development and economic development.

Short-term overreaction, underreaction and efficient reaction: evidence from the London Stock Exchange

International audienceWe examine short-term investor reaction to extreme events in the UK equity market for the period 1989 to 2004 and find that the market reaction to shocks for large capitalization stock portfolios is consistent with the Efficient Market Hypothesis, i.e. all information appears to be incorporated in prices on the same day. However, for medium and small capitalization stock portfolios our results indicate significant underreaction to both positive and negative shocks for many days subsequent to a shock. Furthermore, the underreaction is not explained by risk factors (e.g. Fama and French, 1996) calendar effects, bid-ask biases or unique global financial crises

Trading in option contracts before large price changes: A comparative study of US and UK markets

International audiencePrevious studies indicate that traders in possession of important information are more likely to transact in option contracts rather than the underlying asset. This article examines stock option trading volume before significant price changes in the underlying stock for all S&P100 and FTSE 100 constituent stocks. Our findings indicate irregular option trading volume before a significant amount of large price changes. This effect is less pronounced in the UK market

Short-term patterns in government bond returns following market shocks: International evidence

We employ government bond portfolios from 17 countries in order to investigate the short-run reaction of investors to price shocks. Our findings indicate a uniform return reversal pattern across countries, that persists irrespective of various robustness tests such as different datasets (Datastream/J.P. Morgan), different maturity bands, and day-of-the-week effects. Simulated trading strategies based on our results suggest that this pattern can be employed to generate economically significant profits for many country portfolios. We also demonstrate that significant zero-investment profits are possible even when instead of the expensive to replicate country bond portfolios we employ directly tradable and low transactions cost instruments, such as Bond Futures Contracts

Herding on fundamental information: A comparative study

International audienceThis paper tests for herding towards the market consensus for US and UK leading stocks, and to the best of our knowledge addresses a gap in the literature regarding the importance of major fundamental macroeconomic announcements. The results indicate that US investors tend to herd during days when important macro data are released, and that there have been herding spill-over effects from the US to the UK during earlier financial crises. Further results reveal more differences in herding behavior between the two markets: in the US we find that investors herd due to both fundamentals and non-fundamentals during different crises, when in the UK there is herding only due to fundamentals and only during the Dotcom bubble burst. These results suggest that the drivers of herding behavior are period and country specific