Journal of Emerging Market Finance recent issues

Modified Estimators of the Expected Shortfall

Jadhav, D., Ramanathan, T.V., Naik-Nimbalkar, U.V. — Wed, 07 Oct 2009 03:54:26 PDT

The coherent risk measure Expected Shortfall is popularly considered as an alternative to Value-at-Risk. We briefly review all existing parametric and non-parametric methods to estimate Expected Shortfall. The historical method is considered as the best method of estimation for the Expected Shortfall, though it has a serious disadvantage of over-estimation in the presence of outliers in the return data. In this article, we propose two non-parametric estimators of Expected Shortfall which are robust to outliers. We estimate the Expected Shortfall corresponding to daily returns of some of the selected assets and indices of the Indian (BSE and NSE) and foreign stock markets (NYSE and LSE). The backtesting procedure boasts in confirming that the proposed non-parametric estimators are the best alternatives to the historical method in avoiding over-estimation of Expected Shortfall.

The Dynamics of the Credit Spread and Monetary Policy: Empirical Evidence from the Korean Bond Market

Jang, I., Kim, D. — Wed, 07 Oct 2009 03:54:26 PDT

This paper empirically examines the aggregate determinants of the credit spread and the influence of monetary policy shocks on its dynamics in Korea. Using the innovations accounting technique from an estimated vector autoregression (VAR) model, we provide a set of interesting results on the short run and the medium run determinants of the credit spread and its dynamics. The key findings are that (i) the default risk premium is the major driving force of the credit spread dynamics for low grade bonds, and (ii) monetary policy is a significant driving force of the medium term dynamics of the credit spread.

The Weak-form Efficiency of Chinese Stock Markets: Thin Trading, Nonlinearity and Episodic Serial Dependencies

Lim, K.-P., Habibullah, M. S., Hinich, M. J. — Wed, 07 Oct 2009 03:54:26 PDT

Motivated by the shortcomings of earlier Chinese efficiency studies, the present paper re-examines the weak-form efficiency of Shanghai and Shenzhen Stock Exchanges. Specifically, our adopted methodologies mitigate the confounding effect of thin trading on return autocorrelation, detect both linear and nonlinear serial dependencies in the adjusted returns series, and capture the persistence of dependency structures over time. The result shows that the adjusted returns series from both markets follow a random walk for long periods of time, only to be interspersed with brief periods of strong linear and/or nonlinear dependency structures. This suggests that there are certain time periods when new information is not fully reflected into stock prices. Another interesting finding is that the existence of serial dependencies in both the Shanghai and Shenzhen Stock Exchanges follows one another closely after October 1997. It indicates that both markets respond in a similar way to influences from political, economic, social and institutional changes.

Applicability of Contrarian Strategy in the Bombay Stock Exchange

Locke, S., Gupta, K. — Wed, 07 Oct 2009 03:54:26 PDT

The application of contrarian strategies in the Bombay Stock Exchange (BSE) are examined in this paper, shedding further light on competing explanations underlying this anomaly. Three specific issues are investigated using several models. First, can a trader book a profit by employing a contrarian strategy? The test portfolio earned a contrarian profit of 74.40 per cent above the market return. Second, risk differences between Winner and Loser portfolios are found to be an independent phenomenon. Third, the size of the firm appears to play a vital role in explaining the overreaction hypothesis.

Information Memory and Pricing Efficiency of Futures Contracts: Evidence from the Indian Equity Futures Market

Gupta, K., Singh, B. — Wed, 07 Oct 2009 03:54:26 PDT

The present study investigates the information dissemination efficiency of the Indian equity futures market. Daily log returns of all indices as well as individual stock futures contracts understudy have been found to be non-normal and responding asymmetrically to the information shocks. Volatility clustering in daily log returns of all indices and individual stock futures contracts has been identified, which suggests that Indian equity futures market is not an efficient price-discovery vehicle. In addition, the present study finds an evidence of leverage effect, which implies that traders assign more weightage to bad news, whereas, they cautiously react to positive news. Mean reversion in daily log returns of the Indian equity futures market further suggests that traders (especially retail traders) need to be overcautious while adding equity futures as leverage products in their portfolio because in a highly volatile market, framing a trading rule to earn super normal profit may be an easy task for big/institutional traders but may not be possible for small/uninformed traders.

Calendar Anomalies in the Ghana Stock Exchange

Alagidede, P., Panagiotidis, T. — Fri, 22 May 2009 00:57:45 PDT

Both the day of the week and the month of the year effects are examined for the Ghana Stock Exchange. The latter is an interesting case because (a) it operates for only 3 days per week during the sample period and (b) the increased focus that African stock markets have received lately from both academics and practitioners. Non-linear models from the generalised autoregressive conditional heteroscedasticity (GARCH) family are used in a rolling framework to investigate the role of asymmetries and assess the effects of policy and institutional changes. Contrary to a January return pattern in most markets, an April effect is found for Ghana. The latter disappears in a rolling framework. The day of the week effect is modelled with an asymmetric GARCH model as the benchmark linear paradigm was rejected. Friday's return was found to be the most significant but this seasonality disappears when a rolling window is employed (time-varying asymmetric GARCH).

Asymmetric Volatility in Emerging and Mature Markets

Jayasuriya, S., Shambora, W., Rossiter, R. — Fri, 22 May 2009 00:57:45 PDT

In his Nobel Laureate lecture Engle notes that asymmetric volatility has a significant impact on risk. In this article equity market volatility is estimated using an asymmetric power-GARCH model which nests many other popular models. We estimate the magnitude of asymmetric volatility for several emerging and mature markets for three sub-periods. Many mature markets exhibit large magnitudes of asymmetric volatility and several emerging markets do so as well. The magnitude of asymmetry varies by sub-period and is consistent with the suggestion in Campbell and Hentschel (1992) that asymmetry is greater when markets are more volatile.

International Equity Market Integration: The Indian Conundrum

Bhaduri, S. N., Samuel, A. A. — Fri, 22 May 2009 00:57:45 PDT

The Indian stock market is one of the earliest in Asia, being in operation since 1875, but remained largely outside the global integration process until the late 1980s. In this context, international equity market integration is a topic that has been extensively researched, but still holds much interest from an academic and financial standpoint. The paper, using a Logistic Smooth Transition Regression method, estimates not only the extent of correlation between returns but also the pace of integration. The results suggest that there does exist a very small degree of correlation between the Indian markets and other world markets. However, the pace of the integration is insignificant in most of the cases.

Are Competitive Rating Agencies Efficient?

Mukhopadhyay, B. — Fri, 22 May 2009 00:57:45 PDT

Two very large companies, Moody's and Standard & Poor's, dominate the credit-rating industry. These two companies own around 80 per cent of the market. No other significant major competitors exist, though there are companies that rate local securities in places like China and India. In India, bulk of the ratings done by the two leading rating agencies—CRISIL (S&P majority stakeholder) and ICRA (Moody as the major stakeholder) have more than 80 per cent market share. Is this industry efficient? In this article, we present a simple theoretical model of competitive rating agencies. We establish that competition among rating agencies need not be efficient. We also show that despite price war, a more efficient rating agency will not necessarily drive out the inefficient one.

Real Convergence and the EU Accession Countries: A New Perspective on Real Interest Parity

Holmes, M. J., Wang, P. — Mon, 29 Dec 2008 07:41:48 PST

We test for long–run real interest rate parity involving the ten new member states that joined the European Union in 2004 and the US, UK and Germany. We utilise a novel panel data approach whereby unit root tests are conducted within a seemingly unrelated regression framework. This procedure provides increased power over univariate unit root tests and offers key advantages over existing panel data tests insofar as cross–sectional dependency is addressed and individual stationary panel members are identified. In contrast to existing peripheral Eurozone members, we find that a majority of the new member states are characterised by real interest parity.

Household Borrowing in Vietnam: A Comparative Study of Default Risks of Formal, Informal and Semi-formal Credit

Tra Pham, T. T., Lensink, R. — Mon, 29 Dec 2008 07:41:48 PST

By using data from the Vietnam household survey, this article estimates determinants of the probability of default for households borrowing from formal, informal and semi-formal credit sectors in Vietnam. A special feature of the article is that it investigates which type of lender is faced with the riskiest borrowers. The estimates suggest that borrowers from informal lenders are more risky than borrowers from formal and semi-formal lenders.

Mispricing, Volume, Volatility and Open Interest: Evidence from Indian Futures Market

Vipul, — Mon, 29 Dec 2008 07:41:48 PST

Interdependence of the mispricing, volatility, volume and open interest of stock futures and the volatility and volume of their underlying shares is examined in a vector autoregressive framework. There is evidence of significant mispricing that persists for one day but is not explained by other variables. An increase in the volatility of futures is generally followed by an increase in the volatility of the underlying. The volatility and volume of futures and the underlying exhibit alter–nating increase/decrease cycles with up to five–day lags. These properties can be very useful in forecasting the mispricing and the volatility, volume and open interest for futures and their underlying shares. Futures mispricing does not change financial activities in any predictable manner.

Equity Transfers and Market Reactions: Evidence from Chinese Stock Markets

Gao, L., Kling, G. — Mon, 29 Dec 2008 07:41:48 PST

Our logit models explain positive or negative short–term market reactions due to equity transfers in China. In contrast to former studies, we classify transfers into private transactions, privatisations, transfers among state–owned enterprises (SOEs) and nationalisations. We control for uncompensated transactions, transfers of holding rights, replacements of the CEO and related party transactions. Privatisations trig–ger positive responses, whereas nationalisations cause declining stock prices. The market appreciates reforms in the state–owned sector if reorganisations include the transfer of holding rights and not just replacing the CEO. Uncompensated transfers and non–transparent transactions of related parties diminish gains for minority shareholders.

Imperfect Information and Contagion in Capital Markets: A Test on Emerging Markets Sovereign Bonds

Dupuy, P. — Wed, 27 Aug 2008 02:54:35 PDT

In this article, we test the importance of the role played by imperfect information in emerging markets sovereign bonds. We develop a model of secondary market bond spreads that incorporates measures of both risk and ambiguity created by imperfect information. We test it on a large set of emerging markets over a recent period by using bid and ask spreads as a proxy for the level of ambiguity in each market. We find strong evidence that ambiguity is a key element in sovereign spread determination in secondary markets. We also show that the concept of ambiguity is a good candidate for justifying contagion during a crisis. In particular, we are able to discriminate between crises that arose due to a global disturbance on perceived ambiguity from others.

Bond Market Emergence: The Case of Serbia

Hanousek, J., Kocenda, E., Zemcik, P. — Wed, 27 Aug 2008 02:54:35 PDT

We analyse the emerging Serbian bond market to compare its behaviour to developed markets and to indicate what is behind bond market emergence. As an analytical tool we model the term structure of the bond market. We find that a modified standard model performs rather well in the environment of an emerging market with numerous imperfections and external shocks involved since we obtain a concave yield curve as in developed markets. Further, we show the link of such a structure to macroeconomic developments in terms of responsiveness of interest rates to changes in industrial production and inflation. Finally, the frequency of trading, market liquidity and transparency can be considered as drivers that make the market emerge.

Weak-Form Efficiency of Foreign Exchange Markets of Developing Economies: Some Sri Lankan Evidence

Wickremasinghe, G. B, Kim, J. H — Wed, 27 Aug 2008 02:54:35 PDT

This study examines the empirical validity of the weak-form Efficient Market Hypothesis (EMH) for the foreign exchange market of Sri Lanka, using a battery of (univariate and panel) unit root tests, including those that allow for structural breaks. Monthly exchange rates for four major currencies (Indian rupee, UK pound, US dollar and Japanese yen) vis–à–vis the Sri Lankan rupee are considered in the empirical analysis. The results indicate that the four exchange rates studied follow a random walk, thus supporting the validity of the weak-form EMH. These results have strong implications for the participants of the foreign exchange market of Sri Lanka and government policy makers.

Short Term Equity Returns of Chinese IPOs, 1999 to 2004: Excess Demand, Social Policy and Wealth Effects

Li, L., Fowler, J., Naughton, T. — Wed, 27 Aug 2008 02:54:35 PDT

Our study of 531 Initial Public Offerings (IPOs) on the two Chinese Stock Exchanges during the period 1999 to 2004 indicates initial returns to investors of approximately 114.04 per cent and these earnings were sustained through the first month of trading. High initial returns on IPOs are most often characterised as a reflection of state policy acting with a view to longer-term economic gains and sound social policy.

The sample IPOs were found to be oversubscribed by 243 times the share offered. Such a level of excess demand is a major factor in high initial returns to Chinese IPOs. Regression analysis indicated other major factors associated with these high initial returns including company size, offer size, general market conditions in the period of lead up to the first listing, the proportion of tradable-A shares available and the signal PE ratio at the time of offer. In addition, the paper emphasises the potential for very significant wealth effects, capital formation and development of a private capital market which arises from private sector gains linked to the IPOs.