Does finance affect economic growth? A number of studies have identified a positive correlation between the level of development of a country's financial sector and the rate of growth of its per capita income. As has been noted elsewhere, the observed correlation does not necessarily imply a causal relationship. This paper examines whether financial development facilitates economic growth by scrutinizing one rationale for such a relationship; that financial development reduces the costs of external finance to firms. Specifically, we ask whether industrial sectors that are relatively more in need of external finance develop disproportionately faster in countries with more developed financial markets. We find this to be true in a large sample of countries over the 1980s. We show this result is unlikely to be driven by omitted variables, outliers, or reverse causality.

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Financial Dependence and Growth

In this book, Andrew Harvey sets out to provide a unified and comprehensive theory of structural time series models. Unlike the traditional ARIMA models, structural time series models consist explicitly of unobserved components, such as trends and seasonals, which have a direct interpretation. As a result the model selection methodology associated with structural models is much closer to econometric methodology. The link with econometrics is made even closer by the natural way in which the models can be extended to include explanatory variables and to cope with multivariate time series. From the technical point of view, state space models and the Kalman filter play a key role in the statistical treatment of structural time series models. The book includes a detailed treatment of the Kalman filter. This technique was originally developed in control engineering, but is becoming increasingly important in fields such as economics and operations research. This book is concerned primarily with modelling economic and social time series, and with addressing the special problems which the treatment of such series poses. The properties of the models and the methodological techniques used to select them are illustrated with various applications. These range from the modellling of trends and cycles in US macroeconomic time series to to an evaluation of the effects of seat belt legislation in the UK.

Forecasting, Structural Time Series Models and the Kalman Filter

Our article comprehensively reexamines the performance of variables that have been suggested by the academic literature to be good predictors of the equity premium. We find that by and large, these models have predicted poorly both in-sample (IS) and out-of-sample (OOS) for 30 years now; these models seem unstable, as diagnosed by their out-of-sample predictions and other statistics; and these models would not have helped an investor with access only to available information to profitably time the market.

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A Comprehensive Look at the Empirical Performance of Equity Premium Prediction

This study surveys the literature examining the privatization of state-owned enterprises (SOEs) We review the history of privatization, the theoretical and empirical evidence on the relative performance of state owned and privately owned firms, the types of privatization, if and by how much privatization has improved the performance of former SOEs in non-transition and transition countries, how investors in privatizations have fared, and the impact of privatization on the development of capital markets and corporate governance. In most settings privatization "works" in that the firms become more efficient, more profitable, and financially healthier, and reward investors.

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From State to Market: A Survey of Empirical Studies on Privatization

We model consumption and dividend growth rates as containing (1) a small longrun predictable component, and (2) fluctuating economic uncertainty (consumption volatility). These dynamics, for which we provide empirical support, in conjunction with Epstein and Zin’s (1989) preferences, can explain key asset markets phenomena. In our economy, financial markets dislike economic uncertainty and better long-run growth prospects raise equity prices. The model can justify the equity premium, the risk-free rate, and the volatility of the market return, risk-free rate, and the price‐ dividend ratio. As in the data, dividend yields predict returns and the volatility of returns is time-varying.

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Risks for the Long Run: A Potential Resolution of Asset Pricing Puzzles

We propose a conditional measure of capital market integration that allows us to characterize both the cross-section and time-series of expected returns in developed and emerging markets. Our measure, which arises from a conditional regime-switching model, allows us to describe expected returns in countries that are segmented from world capital markets in one part of the sample and become integrated later in the sample. Our results suggest that a number of emerging markets exhibit time-varying integration. Interestingly, some markets appear to be more integrated than one might expect based on prior knowledge of investment restrictions. Other markets appear segmented even though foreigners have relatively free access to their capital markets.

Time-Varying World Market Integration

We propose a measure of capital market integration arising from a conditional regime-switching model. Our measure allows us to describe expected returns in countries that are segmented from world capital markets in one part of the sample and become integrated later in the sample. We find that a number of emerging markets exhibit time-varying integration. Some markets appear more integrated than one might expect based on prior knowledge of investment restrictions. Other markets appear segmented even though foreigners have relatively free access to their capital markets. While there is a perception that world capital markets have become more integrated, our country-specific investigation suggests that this is not always the case.

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Time‐Varying World Market Integration

Correlations between international equity market returns tend to increase in highly volatile bear markets, which has led some to doubt the benefits of international diversification. This article solves the dynamic portfolio choice problem of a U.S. investor faced with a time-varying investment opportunity set modeled using a regime-switching process which may be characterized by correlations and volatilities that increase in bad times. International diversification is still valuable with regime changes and currency hedging imparts further benefit. The costs of ignoring the regimes are small for all-equity portfolios but increase when a conditionally risk-free asset can be held. In standard international portfolio choice models such as Sercu (1980) and Solnik (1974a), agents optimally hold the world market portfolio and a series of hedge portfolios to hedge against real exchange rate risk. From the perspective of these models, investors across the world display strongly homebiased asset choices. One popular argument often heard to rationalize the “home bias puzzle” relies on the asymmetric correlation behavior of international equity returns. A number of empirical studies document that correlations between international equity returns are higher during bear markets than during bull markets. 1 If the diversification benefits from international investing are not forthcoming at the time that investors need them the most (when their home market experiences a downturn), the strong case for international investing may have to be reconsidered. Our goal is to formally evaluate this claim. To quantify the effect of these asymmetric correlations on optimal portfolio choice, we need a dynamic asset allocation model that accommodates time-varying correlations and volatilities. In the standard portfolio choice models and their empirical applications [French and Poterba (1991), Tesar and Werner (1995)], correlations

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International Asset Allocation With Regime Shifts

A number of countries have delayed the opening of their capital markets to international" investment because of reservations about the impact of foreign speculators on both expected" returns and market volatility. We propose a cross-sectional time-series model that attempts to" assess the impact of market liberalizations, in the form of the offering of depositary receipts country funds and other financial instruments, in an extranational market and market volatility in emerging equity markets. We also examine the impact of capital market" liberalizations on the correlation of emerging equity market returns and the world market return. " Our empirical approach is designed to control for other economic events which might confound" the impact of foreign speculators on local equity markets. Whatever the empirical specification the cost of capital always decreases after a capital market liberalization but the effect is" economically and statistically weak. The effects on volatility and correlation are less robust."

Foreign Speculators and Emerging Equity Markets

We propose a cross-sectional time-series model to assess the impact of market lib- eralizations in emerging equity markets on the cost of capital, volatility, beta, and correlation with world market returns. Liberalizations are defined by regulatory changes, the introduction of depositary receipts and country funds, and structural breaks in equity capital flows to the emerging markets. We control for other eco- nomic events that might confound the impact of foreign speculators on local equity markets. Across a range of specifications, the cost of capital always decreases after a capital market liberalization with the effect varying between 5 and 75 basis points. THROUGHOUT HISTORY AND IN MANY MARKET ECONOMIES, the speculator has been characterized as both a villain and a savior. Indeed, the reputation of the speculator generally depends on the country where he does business. In well- functioning advanced capital markets, such as the United States, the specu- lator is viewed as an integral part of the free-market system. In developing capital markets, the speculator, and in particular the international specula- tor, is looked upon with many reservations. Recently, many so-called "emerging" markets have opened up their capital markets to foreign investors, creating an ideal laboratory for examining the impact of increased foreign portfolio investment in developing equity mar- kets. Our main focus is the impact on expected equity returns-the cost of equity capital. However, we also examine the effects of increased foreign

/pdf/foreign-speculators-and-emerging-equity-markets-ujwiufzquw.pdf

Geert Bekaert

Papers

Time-Varying World Market Integration

Time‐Varying World Market Integration

International Asset Allocation With Regime Shifts

Foreign Speculators and Emerging Equity Markets

Foreign Speculators and Emerging Equity Markets