The Spread of Financial Sophistication through Emerging Markets Worldwide: Volume 32

This study examines the role of social and cultural acceptance of new ideas and the fear of failure in emerging economies within the context of entrepreneurship and growth (Romer Growth Model, 1986). Using data from the Global Entrepreneurship Monitor and the Panel Regression Analysis methodology for a sample of 22 emerging countries over the period 2008–2014, this study finds that perceived opportunities, knowledge of peers involved in startups, and media attention to startups, all indicators of the social acceptance of entrepreneurship, are statistically significant determinants of growth as measured by per capita Gross Domestic Product and reduction in unemployment. This influence is persistent even after controlling for time effects, despite the liquidity crunch and credit squeeze that occurred during the financial crisis starting in 2008. The fear of failure factor did not have a statistically significant influence on growth, confirming the notion that entrepreneurs in emerging economy environments, in particular, are prepared to pursue their goals doggedly, even in the face of less than 50:50 odds of succeeding.

As the Association of Southeast Asian Nations (ASEAN) becomes an emerging market, US investors will want to know how their favorite method of calculating asset pricing fits into this new undeveloped market. Also, as the ASEAN becomes more internationalized, managers within will look for ways in which the capital asset pricing model (CAPM) can be applied for their needs. This research looks at the capabilities of the CAPM using ex-post time varying and compares it with the traditional constant beta model. The data include five US sectors and five ASEAN countries, for 10 total portfolios. Find that using a simple nonparametric method that allows for time variation is not statistically different from the traditional constant beta model for portfolios. This research provides additional support for the constant beta.

It has long been challenged that the distributions of empirical returns do not follow the log-normal distribution upon which many celebrated results of finance are based including the Black–Scholes Option-Pricing model. Borland (2002) succeeds in obtaining alternate closed form solutions for European options based on Tsallis distribution, which allow for statistical feedback as a model of the underlying stock returns. Motivated by this, we simulate two distinct time series based on initial data from NIFTY daily close values, one based on the Gaussian return distribution and the other on non-Gaussian distribution. Using techniques of non-linear dynamics, we examine the underlying dynamic characteristics of both the simulated time series and compare them with the characteristics of actual data. Our findings give a definite edge to the non-Gaussian model over the Gaussian one.

This chapter focuses on examining how changes in the liquidity differential between nominal and TIPS yields influence optimal portfolio allocations in U.S. Treasury securities. Based on a nonparametric estimation technique and comparing the optimal allocation decisions of mean-variance and CRRA investor, when investment opportunities are time varying, I present evidence that liquidity risk premium is a significant risk-factor in a portfolio allocation context. In fact, I find that a conditional allocation strategy translates into improved in-sample and out-of-sample asset allocation and performance. The analysis of the portfolio allocation to U.S. government bonds is particularly important for central banks, specially in developing countries, given the fact that, collectively they have accumulate a large holdings of U.S. securities over the last 15 years.

We examine the incremental cross-sectional role of several common risk factors related to size, book-to-market, and momentum in size-and-momentum-sorted portfolios. Unlike the existing literature, which focuses on the conditional mean specification only, we evaluate the common risk factors’ incremental explanatory power in the cross-sectional characterization of both average return and conditional volatility. We also investigate the role of ex-ante market risk in the cross-section. The empirical results demonstrate that the size-and-momentum-based risk factors explain a significant portion of the cross-sectional average returns and cross-sectional conditional volatility of the benchmark equity portfolios. We find that the Fama–French (1993) factors and the ex-ante market risk are priced in the cross-sectional conditional volatility. We conclude that the size-and-momentum-based factors provide a source of risk that is independent of the Fama–French factors as well as ex-post and ex-ante market risk. Our results bolster the risk-based explanation of the size and momentum effects.

This research investigated the market conditions caused by IPO advertising by examining the impact of IPO advertising, based on the US stock market from 1986 to 2009. The relationship between advertising intensity in the IPO year and the degree of IPO underpricing was examined. It was found that an increase in advertising intensity around an IPO event increases the initial returns. Simultaneously, however, advertising intensity around an IPO event also increases the degree of overvaluation, which raises the question as to whether advertising serves primarily as a mechanism to convey a firm’s true value to investors. The theoretical valuation of IPO and the relation between IPO advertising and the degree of stock overvaluation are discussed. Based on the Peasnell’s (1982) residual-income valuation framework (henceforth RIV), IPO advertising was proved to cause stock price to be more overvalued in the secondary market: a positive relationship was found between advertising and the degree of stock overvaluation relative to its theoretical value. Accordingly, an alternative hypothesis, that advertising inflates the short-run stock price, was proposed. The results of this study are consistent with the view of Purnanandam and Swaminathan (2004), namely that the stock price of newly listed firms can be overvalued.

The major objective of this study is to inspect the differences in the effect of derivatives on the stability between banks from emerging countries and those from recently developed countries.

According to the repercussions of the recent financial crisis, we divide the whole period into normal period “the pre-crisis period,” 2003–2006, and turbulent period “the crisis & post-crisis period,” 2007–2011. We use the Generalized Methods of Moments (GMM) estimator technique developed by Blundell and Bond (1998) to estimate our regressions.

Our main conclusions show that, in general, using derivatives by banks from emerging countries deteriorates their stability especially during the turbulent period, whereas, using derivatives do not weaken the stability of banks from recently developed countries. We deduce that banks from emerging countries are more destabilized by using derivatives than banks from recently developed countries.

We assess whether smaller investors are more likely to hold shares of closed-end funds that invest more heavily in illiquid securities. We also examine the relationship between the liquidity of the securities held in the portfolios of closed-end mutual funds (portfolio liquidity) and the liquidity of the closed-end funds’ shares (fund-share liquidity). Using a sample of 1,619 fund-years from 2010 to 2012, we find that smaller investors are more likely than institutional investors to own closed-end funds. We also find that the liquidity of closed-end funds’ portfolios is positively associated with the liquidity of the funds’ shares. Our findings are consistent with the “liquidity benefits” notion that closed-end funds are a means for smaller investors to invest in less liquid securities. In addition, our findings are consistent with the “valuation skepticism” notion which indicates that, due to the difficulty of objectively valuing illiquid securities, different perceptions of the value of illiquid securities held in funds’ portfolios may result in greater fund-share liquidity.

This chapter introduces demographic variables in empirical regression to help find whether demographic changes have an impact on economic growth. There is evidence from estimated values in this chapter to suggest that there is no impact that demographic changes in Hong Kong is affecting the economic growth. The population growth has purely a transition impact where the fertility rate was low in early 2000 up to 2015 as the size of the dependency ratio increases. Besides testing demographic variables the government emphasises better education for all people of ages for prosperous growth but in fact has a negative response on educational investment on the growth of the economy. A well-educated country individual does not suggest a higher productivity in economy growth. An important implication is that there has been no single variable as yet that has seriously impacted the economy growth, but there will be changes in the coming years and has to be attended in result to avoid a diminishing economy.

This chapter examines the impact of working capital management (WCM now onwards) which is measured by cash conversion cycle (CCC now onwards) on the financial performance of firms in the Indian context. The period of study is from the year 2000 to 2014, that is, for a span of 15 years for 4,687 companies listed on the National Stock Exchange. This chapter uses regression model to analyze panel data. Data for 4,687 listed companies have been analyzed for a period of 15 years. For some companies with data availability issues, the period of inclusion is less than 15 years. This chapter is limited to a sample of Indian firms; further research could examine the generalizability of these findings to other countries. Some previous studies have been undertaken on this topic, but the dataset used for this chapter is comprehensive enough to delineate the WCM and performance dynamics in the Indian context. Improved working capital policy could improve firm profitability by reducing the firm’s CCC, thereby creating additional firm value. In addition, the results can be used for other purposes, including monitoring of firms by auditors, debt holders, and other stakeholders. This chapter contributes to the literature by extending the extant literature in an emerging market context. To the authors’ knowledge, this is the first empirical study to address this issue in the Indian context based on a large dataset covering more than 4000 companies.

This chapter is devoted to budget investments in the Russian Federation, which nowadays have a double meaning. This fact often causes confusion and misunderstandings in the implementation of investment activities.

Traditional Russian understanding of investment corresponds to the concept of capital expenditures or investments in fixed assets. As a result of budget investments, according to the budget legislation, the cost of public property necessarily increases. Such investments are budget expenditures for the creation (or purchase) of new capital assets. In this case, the budget investments are like a synonym for capital expenditures.

A new approach to the concept of cost of investments is linked to perception and rethinking of the concept of investment prevailing in the countries of Western Europe and North America. Under this approach, investments are understood as a commercial activity of the foreign investors, which consist of investing their funds in an unlimited range of objects of entrepreneurial activity in the territory of Russia. This approach is also embodied by the legislation of the Russian Federation.

However, in the second (not traditional for Russia) meaning, investment are carried out at the budget execution. These are, for example, assets of sovereign wealth funds of the Russian Federation, which are called the Reserve Fund and National Welfare Fund. These funds are formed by part of the revenues associated with oil production in the case of it exceeding its cost base per barrel, and the free assets of these funds are located in certain foreign currencies and securities.

This chapter presents several approaches for identifying and dating the speculative bubble on real estate market. Using the real estate price index (IPAI), statistical and structural approaches were combined in order to detect the existence of a bubble on the Moroccan real estate market. The results obtained affirm that the Moroccan real estate market experienced a speculative bubble during the period 2006–2008 explained mainly by the boom of credit during the same period. The use of the Markov switching model affirmed that the speculative bubble on Morocco is cyclic and consequently corroborates the critic formulated by Evans (1991) concerning the traditional approaches for the detection of financial bubbles. Thus, the analysis of the series of the bubble, extracted using the Kalman filter, affirms the existence of two regimes, namely an explosive regime and a normal regime. The first regime describes the periods of explosion of the bubble and lasts for about 9 quarters, while the second, lasting for 14 quarters, describes the periods of return to the average cycle.

Companies are wishing to incorporate good corporate governance practices into their organization in order to be more attractive to investors, knowing whether this influences their financial indicators and profitability or not. This, in fact, is beneficial for investors so they know that a company who applies the principles of corporate governance (CG) presents best management practices and transparent information, safeguarding the interests of all its stakeholders, which helps their investment decision; reducing market uncertainty, making it more efficient and liquid. The research focuses on the companies listed in the Stock Exchange of Lima that had implemented CG strategies in their organizations.

This chapter is concerned with finding the optimal arbitrage path in a foreign exchange market. First, an algorithm for the optimal arbitrage path is derived. Then, the Markov chain solution to the problem of most profitable path is given. Also, a game theory perspective to the problem is given.

The aim of this chapter is to assess the real exchange rate misalignments. A smooth transition autoregressive model (STAR) is used for Tunisian exchange market. This model allows us to see whether these differences are temporary or persistent over the period 1975–2012. We start by defining the exchange rate’s fundamental determinants to provide the equilibrium exchange rate value. Then, we study the observed exchange rate adjustment toward its equilibrium level. Vector autoregressive model and vector error correction model are applied to characterize the joint dynamics of variables in the long run. The results indicate a long-run relationship between variables. In order to consider the nonlinearity for better results, we will move to nonlinear smooth transition model. We found there is a high degree of exchange rate misalignment. We recognized that this difference decreases in the long run and disappears at the end.