Showing papers on "Market capitalization published in 1995"

Stock Market Development and Financial Intermediaries: Stylized Facts

Abstract: The three most developed stock markets are in Japan, the United Kingdom, and the United States, and the most underdeveloped markets are in Colombia, Nigeria, Venezuela, and Zimbabwe. Markets tend to be more developed in richer countries, but some markets commonly labeled emerging (for example, in Malaysia, the Republic of Korea, and Thailand) are systematically more developed than some markets commonly labeled developed (for example, in Australia, Canada, and many European countries). World stock markets are booming. Between 1982 and 1993, stock market capitalization grew from $2 trillion to $10 trillion, an average 15 percent a year. A disproportionate amount of this growth was in emerging stock markets, which rose from 3 percent of world stock market capitalization to 14 percent in the same period. Yet there is little empirical evidence about how important stock markets are to long-term economic development. Economists have neither a common concept nor a common measure of stock market development, so we know little about how stock market development affects the rest of the financial system or how corporations finance themselves. Demirguc-Kunt and Levine collected and compared many different indicators of stock market development using data on 41 countries from 1986 to 1993. Each indicator has statistical and conceptual shortcomings, so they used different measures of stock market size, liquidity, concentration, and volatility, of institutional development, and of international integration. Their goal: To summarize information about a variety of indicators for stock market development, in order to facilitate research into the links between stock markets, economic development, and corporate financing decisions. They highlight certain important correlations: In the 41 countries they studied, there are enormous cross-country differences in the level of stock market development for each indicator. The ratio of market capitalization to GDP, for example, is greater than 1 in five countries and less than 0.10 in five others. There are intuitively appealing correlations among indicators. For example, big markets tend to be less volatile, more liquid, and less concentrated in a few stocks. Internationally integrated markets tend to be less volatile. And institutionally developed markets tend to be large and liquid. The three most developed markets are in Japan, the United Kingdom, and the United States. The most underdeveloped markets are in Colombia, Nigeria, Venezuela, and Zimbabwe. Malaysia, the Republic of Korea, and Switzerland seem to have highly developed stock markets, whereas Argentina, Greece, Pakistan, and Turkey have underdeveloped markets. Markets tend to be more developed in richer countries, but many markets commonly labeled emerging (for example, in Korea, Malaysia, and Thailand) are systematically more developed than markets commonly labeled developed (for example, in Australia, Canada, and many European countries). Between 1986 and 1993, some markets developed rapidly in size, liquidity, and international integration. Indonesia, Portugal, Turkey, and Venezuela experienced explosive development, for example. Case studies on the reasons for (and economic consequences of) this rapid development could yield valuable insights. The level of stock market development is highly correlated with the development of banks, nonbank financial institutions (finance companies, mutual funds, brokerage houses), insurance companies, and private pension funds. This paper - a product of the Finance and Private Sector Development Division, Policy Research Department - is part of a larger effort in the department to study stock market development. The study was funded by the Bank's Research Support Budget under the research project Stock Market Development and Financial Intermediary Growth (RPO 678-37).

Pre and post-October 1987 stock market linkages between U.S. and Asian markets

Abstract: This paper documents the presence of a common stochastic trend between the U.S. and the Asian stock market movements during the post-October 1987 period. The evidence suggests that the “cointegrating structure” that ties these stock market together has substantially increased since October 1987. The influence of the U.S. stock market innovations was also found to be greater during the post-October period. The results also indicate that the Asian equity markets are less integrated with Japan's equity market than they are with the U.S. market.

Stock market development and firm financing choices

Abstract: The authors empirically analyze the association between firm financing choices and the level of development of financial markets in 30 countries for the period 1980-91 For the whole sample, there is a statistically significant negative correlation between stock market development, as measured by the ratio of market capitalization to gross domestic product, and the ratios of both long-term and short-term debt to firms' total equity For developed markets in the sample, further stock market development leads to a substitution of equity for debt financing In developing markets, by contrast, large firms become more leveraged as the stock market develops, whereas the smallest firms appear not to be significantly affected by market development

US equity investment in emerging stock markets

Abstract: This article examines the US equity flows to emerging stock markets from 1978 to 1991 and draws three main conclusions. First, despite the recent increase in US equity investment in emerging stock markets, the US portfolio remains strongly biased toward domestic equities. Second, of the fraction of the US portfolio that is allocated to foreign equity investment, the share invested in emerging stock markets is roughly proportional to the share of the emerging stock markets in the global market capitalization value. Third, the volatility of US transactions in emerging-market equities is higher than in other foreign equities. The normalized volatility of US transactions appears to be falling over time, however, and the authors find no relation between the volume of US transactions in foreign equity and local turnover rates or volatility of stock returns.

The cross-section of stock returns : evidence from emerging markets

Abstract: Cross-sectional tests of asset returns have a long tradition in finance. The often-used capital asset pricing model (CAPM) and the arbitrage pricing theory both imply cross-sectional relationships between individual asset returns and other factors, and tests of those models have done much to increase understanding of how markets price risk. But much about the way assets are priced remains unclear. After much testing, numerous empirical anomalies about the CAPM cast doubt on the central hypothesis of that theory: that on a cross-sectional basis a positive relationship exists between asset returns and assets'relative riskiness as measured by their Bs (beta being the ratio of the covariance of an asset's return with the market return to the variance of the market return). As tenuous as the relationship between B and returns may be, other risk factors apparently influence U.S. equity market returns significantly: market capitalization (or size), earnings-price ratios, and book-to-market value of equity ratios. Once these factors are included as explanatory variables in the cross-sectional model, the relationship between B and returns disappears. Much"international"empirical work has focused on more developed markets, especially Japan and the United Kingdom, with some evidence from other European markets as well. The international evidence largerly confirms the hypothesis that other factors besides B are important in explaining asset returns. The authors expand the empirical evidence on the nature of asset returns by examining the cross-sectional pattern of returns in the emerging markets. Using data from the International Finance Corporation for 19 developing country markets, they examine the effect on asset returns of several risk factors in addition to B. They find that, in addition to B, two factors - size and trading volume - have significant explanatory power in a number of these markets. Dividend yield and earnings-price ratio are also important, but in slightly fewer markets. For several of the markets studied, the relationship between all four of these variables and returns is contrary to the relationship documented for U.S. and Japanese markets. In several countries, exchange-rate risk is a significant factor. With independent new empirical evidence introduced into the asset-pricing debate, future research must now cope with the idea that any theory hoping to explain asset pricing in all markets must explain how factors can be priced differently simply by crossing an international border. Is it market microstructure that causes these substantial differences? Or (perhaps more likely) do regulatory and tax regimes force investors to behave differently in various countries? As a final hypothesis, can any of these results be attributed to the segmentation or increasing integration of financial markets? The authors offer little evidence on these questions but hope their results will spur further work on the cross-sectional relationship of markets and of assets in testing asset pricing theories.

Real Estate Investment Trusts, Small Stocks, and Bid-Ask Spreads

Abstract: This study examines the liquidity of Real Estate Investment Trusts (REITs), as measured by their bid-ask spread. We find that REIT spreads have increased over the period 1986–1990, are inversely related to market capitalization, and are similar in magnitude to spreads on other stocks of comparable size. Analysis of variance tests indicate that REIT spreads are similar across equity, mortgage and hybrid asset types. Multivariate regression results indicate that market capitalization is the primary determinant of REIT bid-ask spreads, and spreads are larger for National Association of Securities Dealers Automated Quotations (NASDAQ) REITs than for New York Stock Exchange (NYSE) REITs. The regression results also indicate that spreads are lower for equity REITs than for mortgage or hybrid REITs, and are inversely related to the fraction of the REIT's shares held by institutional investors. The similarity between REIT spreads and those of other common stocks holds in both bull and bear real estate markets and suggests that, from a liquidity perspective, REITs are similar to other common stocks.

The Market for Shares of Companies with Unlimited Liability: The Case of American Express

Abstract: If share ownership entailed unlimited liability, would there be an active stock market? Some legal scholars have maintained that no liquid stock market could exist. Others have claimed the result would depend on the specific liability rule. But little empirical evidence has been cited to support any single theory. This article tests four theories of the effect of liability rules on stock market behavior through a study of trading in shares of the American Express Company during the 1950s, when these shares carried pro rata unlimited liability. This study shows that American Express stock traded regularly among a diverse group of shareholders and was not deemed especially risky by the market. The evidence suggests that limited liability is not a necessary condition for the functioning of markets for company shares.

Linkages among European and world stock markets

Abstract: Causal relations and dynamic interactions among equity returns in ten countries for the period 1983–1994 are analysed An innovation accounting approach based on a multivariate vector autoregressive (VAR) model is used to estimate the proportion of each market return's forecast error attributable to innovations in foreign market returns Three major results appear The variance decompositions indicate a strong degree of economic interaction among stock markets The US stock market has a considerable influence on stock market performance in almost every country, while there is no substantial inter-continental influence from the European stock markets on the world's two largest equity markets in New York and Tokyo Finally, the pattern of the impulse-response functions illustrates a rapid international transmission of stock market events, supporting the hypothesis of international stock market efficiency

Using Information from Tradinig in Trading and Portfolio Management

Abstract: As electronic trading systems become more prevalent, perceptions of “best execution” adjust accordingly. This presentation examines the relationships between transaction costs and (1) trade size relative to market capitalization, (2) trade size relative to average trading volume, (3) management style, (4) patience in trading, and (5) use of crossing networks.This presentation comes from the Execution Techniques, True Trading Costs, and the Microstructure of Markets conference held in Toronto, Ontario, Canada, on December 3-4, 1992.

Is there an intra-month effect on stock returns in developing stock markets?

Abstract: An intra-month effect on stock returns is found in the US stock market and the Australian stock market, but a reverse intra-month effect is found in the Japanese market. It is shown that such an effect is almost non-existent in the stock markets of Singapore, Malaysia, Hong Kong, Taiwan, and Thailand. The returns of these markets seem to be generated by a process which is fairly independent of other major markets. This supports the argument that investors should diversify beyond country boundaries

Emerging Equity Market Volatility

Abstract: Returns in emerging capital markets are very different from returns in developed markets. While most previous research has focused on average returns, we analyze the volatility of the returns in emerging equity markets. We characterize the time-series of volatility in emerging markets and explore the distributional foundations of the variance process. Of particular interest is evidence of asymmetries in volatility and the evolution of the variance process after periods of capital market reform. We shed indirect light on the question of capital market integration by exploring the changing influence of world factors on the volatility in emerging markets. Finally, we investigate the cross-section of volatility. We use measures such as asset concentration, market capitalization to GDP, size of the trade sector, cross-sectional volatility of individual securities within each country, turnover, foreign exchange variability and national credit ratings to characterize why volatility is different across emerging markets.

Do `speculative traders' increase Stock Price Volatility? Empirical evidence from the Bombay Stock Exchange

Abstract: In India there existed, until recently, a form of highly leveraged margin trading called the Badla system, for certain stocks categorized as group A stocks. In March of 1994, the Securities and Exchange Board of India (SEBI) has effectively banned the facility blaming it for causing "excessive speculation". We study the effect of badla trading on stock return volatility by comparing the daily data from 1992 for group A and a matched sample of group B stocks. After controlling for other factors such as trading frequency, the average price level and the market capitalization of the firms, we find that the residual variance is actually lower for the group A stocks. Also, variance ratio tests indicate, that after accounting for other factors, no differences in the magnitude of price reversals (serial correlation) for both groups of stocks. Hence, SEBI's decision does not seem justified on economic grounds.

Do `speculative traders' increase Stock Price Volatility? Empirical evidence from the Bombay Stock Exchange

Abstract: In India there existed, until recently, a form of highly leveraged margin trading called the Badla system, for certain stocks categorized as group A stocks. In March of 1994, the Securities and Exchange Board of India (SEBI) has effectively banned the facility blaming it for causing "excessive speculation". We study the effect of badla trading on stock return volatility by comparing the daily data from 1992 for group A and a matched sample of group B stocks. After controlling for other factors such as trading frequency, the average price level and the market capitalization of the firms, we find that the residual variance is actually lower for the group A stocks. Also, variance ratio tests indicate, that after accounting for other factors, no differences in the magnitude of price reversals (serial correlation) for both groups of stocks. Hence, SEBI's decision does not seem justified on economic grounds.

Stock market development and financial intermediaries: stylized facts

Abstract: World stock markets are booming. Between 1982 and 1993, stock market capitalization grew from $2 trillion to $10 trillion, an average 15 percent a year. A disproportionate amount of this growth was in emerging stock markets, which rose from 3 percent of world stock markets capitalization to 14 percent in the same period. Yet there is little empirical evidence about how important stock markets are to long-term economic development. Economists have neither a common concept nor a common measure of stock market development, so we know little about how stock market development affects the rest of the financial system or how corporations finance themselves. The authors collected and compared many different indicators of stock market development using data on 41 countries from 1986 to 1993. Each indicator has statistical and conceptual shortcomings, so they used different measures of stock market size, liquidity, concentration, and volatility, of institutional development, and of international integration. Their goal: to summarize infromation about a variety of indicators for stock market development, in order to facilitate research into the links between stock markets, economic development, and corporate financing decisions. They highlight certain important correlations: (i) In the 41 countries they studied, there are enormous cross-country differences in the level of stock market development for each indicator. The ratio of market capitalization to the gross domestic product (GDP), for example, is greater than 1 in five countries and less than 0.10 in five others. (ii) There are intuitively appealing correlations among indicators. For example, big markets tend to be less volatile, more liquid, and less concentrated in a few stocks. Internationally integrated markets tend to be less volatile. And institutionally developed markets tend to be large and liquid. (iii) The three most developed markets are in Japan, the United Kingdom, and the United States. The most underdeveloped markets are in Colombia, Nigeria, Venezuela, and Zimbabwe. Malaysia, the Republic of Korea, and Switzerland seem to have highly developed stock market, whereas Argentina, Greece, Pakistan and Turkey have underdeveloped in richer countries, but many markets commonly labeled"emerging"(for example, in Korea, Malaysia,and Thailand) are systematically more developed than markets commonly labeled"developed"(for example, in Australia, Canada, and many European countries). (iv) Between 1986 and 1993, some markets developed rapidly in size, liquidity, and international integration. Indonesia, Portugal, Turkey, and Venezuela experienced explosive development, for example. Case studies on the reasons for (and economic consequences of) this rapid development could yield valuable insights. (v) The level of stock market development is highly correlated with the development of banks, nonbank financial institutions (finance companies, mutual funds, brokerage houses), insurance companies, and private pension funds.

Experts' opinions toward price stability during the stock market crisis

Abstract: A new environment has evolved in the international stock markets, as expressed by the occurrence of market crises and high swings of stock prices. The stock prices are supposed to respond to real data under the market efficiency hypothesis. However, in some cases, price fluctuation is influenced by other conditions which may lead to a crisis. This paper discusses the issue based on the opinions of the stock market experts. The Amsterdam Stock Exchange (ASE) has been selected as a case for this research. The study indicates there is no significant difference among the perceptions of the three groups of ASE stock market experts concerning nine stated conditions which may lead to a stock market crisis, while significant differences exist among the ASE brokers, bankers and specialists concerning six stated elements that minimize the probability of evolving a stock market crises. There is a positive association among the groups of Amsterdam stock market experts about the total conditions that may lead to a stock market crisis, but there is no association concerning the total elements that minimize the probability of evolving a stock market crisis.

Will HMOs Pass Their Physical

Abstract: It's easy to forget the humble beginnings of America's health maintenance organizations (HMOs). Conceived as an experiment in providing care to a small number of members for a set monthly fee, they are now among the most potent forces in US healthcare. One in five Americans belongs to an HMO. Compound annual growth has averaged 12 percent during the past decade. And the industry has spawned several profitable publicly traded companies. What accounts for this remarkable success? The simple story is that HMOs offered the right product at the right time. Employers were looking for ways to contain the escalating cost of insuring their employees. HMOs were offering comprehensive coverage for a fixed fee - often more than 30 percent below indemnity prices. They soon found they could use their growing patient flows to squeeze healthcare providers (chiefly hospitals and physicians) on costs, winning savings that they were able to pass on to customers or keep for themselves. Healthcare markets across the United States have followed a consistent pattern. At first, providers do little or nothing as HMOs begin gaining share. As penetration increases, they enter a price war to preserve share - and HMOs strengthen their position as a result. Providers finally figure out the new game just as HMOs are reaching the height of their share penetration. When they do, their impact on HMO performance can be considerable. Only a few markets have reached the stage in their evolution where providers are becoming a competitive force. HMOs in these markets are often genuinely surprised to find providers flexing new muscles. They tend to assume that the skills that helped them prosper during the early days of managed care growth will also ensure their success as markets mature. In fact, they risk losing substantial shareholder value over the next few years if they fail to rethink their approach to managing provider relationships. Many HMOs in less mature markets will soon face the same challenge. Changing market conditions mean that they must develop new strategies and capabilities if they are to play a central and profitable role in the healthcare delivery systems of the future. The emerging challenge HMOs have enjoyed a remarkable run of success. Earnings have grown at 45 percent a year, and market capitalizations for the top 25 publicly traded HMOs have risen by 33 percent a year since 1985. But troubling signs can already be seen. Between March and August 1995, while market averages were at record highs, the same top 25 publicly traded [TABULAR DATA FOR EXHIBIT 1 OMITTED] HMOs saw their market valuations fall by 25 percent. This decline may reflect a growing awareness on Wall Street that many HMOs are no longer in a position to demand lower rates from providers or to dictate changes in their operations. Instead, it is providers that, having strengthened their relationships with patients and increased their influence over care delivery, are beginning to find themselves in a position to control and retain patients. The reality in many markets today is that a provider can walk away from the HMO upon which it had previously depended and be sure that most of its patients will soon follow. This power shift is evident in local markets across the United States as they follow a consistent evolutionary path from a traditional, fee-for-service stage to timid, turbulent, and potentially restructured stages (Exhibit 1). The shift tends to begin in the turbulent stage of evolution - the one where HMOs are most at risk. The difficulties presented by this shift are already affecting some of the biggest US markets, such as Los Angeles. Many other major metropolitan markets, especially those on the East Coast, are likely to evolve to the turbulent stage within the next two to five years. The turbulent stage This evolutionary stage is characterized by intensifying competition as providers attempt to consolidate, to form horizontal and vertical alliances, and to reposition themselves with employees and consumers in order to counter the market power of fast-growing health plans and share in the opportunities created by restructuring markets. …