Ilhan Meric

Potential gains from international portfolio diversification and inter-temporal stability and seasonality in international stock market relationships

Abstract In this paper, we find empirical evidence that diversification across countries results in greater risk reduction than diversification across industries. Our inter-temporal stability tests indicate that, the longer the time period considered, the better proxies ex post patterns of co-movement can be for the ex ante co-movements of international stock markets. Our seasonality tests show that international stock market co-movements are stable in the September–May period, but relatively unstable in the May–September period.

Risk and Return in the World's Major Stock Markets

The Sharpe and Treynor indexes measure portfolio return performance in terms of only one risk characteristic, although several risk characteristics of the investment may be important for the investor. Data envelopment analysis (DEA), a new operations research technique, makes it possible to measure investment return performance in terms of a group of various risk characteristics that may be equally important for the investor. The authors use six different risk measures to compare the return performances of the worlds 16 major stock markets during the 1988–1997 and 1995–1997 periods. The U.S. stock market had the best return performance in terms of systematic risk, return volatility, market capitalization, and book value/market equity individual risk characteristics in both periods. The U.S., Dutch, German, and Swiss stock markets had the best overall return performance in terms of all six risk characteristics in both periods. The U.K. stock market had one of the best overall return performances in terms of all six risk characteristics in the 1995-1997 period.

Correlation Between the World's Stock Markets Before and After the 1987 Crash

ow correlations between national stock markets are often presented as evidence in support of the portfolio L gains to investors from international &versification (see, e.g., Levy and Sarnat [1970], Solnik [1974], Lessard [1976], Watson [1978], Meric and Meric [1989], and DeFusco, Geppert, and Tsetsekos [1996]). Several studies provide empirical evidence that correlations between the world’s stock markets increased significantly after the international stock market crash of October 1987 (see, e.g., King and Wadhwani [1990], Hamao, Masulis, and Ng [1990], Malliaris and Urrutia [1992], Arshanapalh and Doukas [1993], Lau and McInish [1993], and Lee and Kim [1993]). These studes, however, cover only a short time period after the crash. There are no published studies that investigate whether the changes in the comovements of international stock markets after the crash are long-term changes. We seek an answer to this question by comparing the long-term comovements of international stock markets before and after the crash. Our findmgs in&cate that correlations between national stock markets increased substantially, and therefore the benefits of international diversification decreased considerably after the crash. Several-day speculative leads or lags in the comovements of international stock markets can obscure long-term relationships. Therefore, monthly data are more suitable for studying the long-term comovements of international stock markets. We use monthly stock market index returns for this purpose. The data are obtained from Morgan Stanley Capital International Perspective (MSCIP) publications. The study covers the national stock markets of two North American (Canada and US.), four European (France, Germany, Switzerland, and U.K.), and four Far East (Australla, Hong Kong, Japan, and Singapore) countries, the world’s ten largest stock markets. To fachtate comparison, MSCIP index returns are adjusted for exchange rate changes. The combined market capitalization of the companies included in these indexes represents approximately 60% of the total market value of all stocks traded on the stock markets of these countries.

A comparison of the financial characteristics of U.S. and Japanese manufacturing firms

The U.S. and Germany rank #1 and #3, respectively, in the world, in terms of the total amount of international trade. U.S. and German firms compete with one another for a larger market share in other countries and in each other’s local markets. And yet, there are no published studies that compare the financial management practices of U.S. and German firms. In this paper, we make a contribution to the finance literature on this subject by comparing the financial characteristics of U.S. and German manufacturing firms. Our findings provide valuable insights for corporate financial managers and for investors who invest in these countries. Using a sample of 1166 firms, we find that the financial characteristics of U.S. manufacturing firms differ significantly from those of German manufacturing firms. MANOVA test results indicate that U.S. firms exhibit higher liquidity, lower debt, higher profitability, and lower total assets turnover. These findings are also supported by the logistic regression results. We suggest that better financial performance of U.S. firms could be attributed to more business-friendly employment laws and lower levels of unionization in the United States.

Sector Dispersion and Stock Market Predictability

This paper investigates the lead/lag relationship between the variation of the 10 primary sector indexes (sector dispersion) with market returns and market volatility. The sample consists of U.S. data from January 1974 through December 2003. This study documents a statistically significant lead/lag relationship between sector dispersion and both market returns and market volatility. Asymmetry analysis reveals that high sector dispersion is a consistent predictor of market volatility. Dispersion is found to be an effective predictor of bear market volatility, and both bull market and bear market returns.

The Determinants of Stock Returns in theOctober 9, 2007–March 9, 2009 Bear Market

The bear market of October 9, 2007–March 9, 2009, was the worst in U.S. history since the Great Depression. During this period, U.S. stocks lost about 58% of their value in just 16 months. Because of declining real estate prices, foreclosures, and the large amount of mortgage-backed assets held by banks, the amount of bank credit available to business firms was sharply reduced, creating a serious liquidity shortage. The authors test the hypothesis that technical insolvency and bankruptcy risks were significant determinants of stock returns in the October 9, 2007–March 9, 2009 bear market. They also test several hypotheses related to the effects of beta, firm size, market-to-book ratio, and volatility on stock returns in bear markets and stock market crashes.

Co-Movements of U.S. and Latin American Equity Markets in Bull and Bear Markets

ABSTRACT In this paper, we study the co-movements of the U.S., Argentine, Brazilian, Chilean, and Mexican equity markets during the October 12, 1998-March 24, 2000 bull market and the March 24, 2000-September 10, 2001 bear market. We find that these five markets are more closely correlated and, therefore, there is less diversification benefit to global investors during the bear market than during the bull market. Our findings, using rolling correlation analysis, indicate that the most volatile U.S. correlation coefficient is with Chile, both in the bull market and in the bear market. The U.S. correlation coefficient with Mexico is more stable (i.e., more predictable) during the bull market than during the bear market. However, the U.S. correlation coefficients with Argentina and Chile are less stable (i.e., less predictable) during the bull market than during the bear market. The degree of stability (i.e., predictability) of the U.S.-Brazilian correlation coefficient is about the same, both in the bull market and in the bear market. We use impulse simulation analysis to study the responses of the four Latin American markets to a simulated shock in the U.S. market. The shock causes strong responses in all four Latin markets. The Argentine and Mexican markets show a stronger response in the bull market than in the bear market. However, the Brazilian and Chilean markets show a stronger response in the bear market than in the bull market. The shock causes considerable turbulence in all markets. The turbulence lasts longer in the bear market than in the bull market. RESUMEN. Este documento estudia los co-movimientos ocurridos en los mercados bursátiles de Estados Unidos, Argentina, Brasil, Chile y México durante el período bajista ocurrido entre octubre 12 de 1998 a marzo 24 de 2000, y el mercado alcista entre marzo 24 de 2000 a septiembre 10 de 2001. Hemos encontrado que estos cinco mercados se encuentran estrechamente vinculados y, consecuentemente, ofrecen menores ventajas diversificadas para los inversores globales durante el mercado bajista que durante el período alcista. Para elaborar nuestro estudio utilizamos un procedimiento analítico de correlación renovable, que indicó que los mayores coeficientes de correlación se establecen con Chile, tanto en el mercado alcista como bajista. El coeficiente de correlación norteamericano con México es más estable (Ej: mayor grado de previsibilidad) durante el mercado alcista que el bajista. No obstante, los coeficientes de correlación entre Norteamérica y Argentina y Chile son menos estables (Ej: menor previsibilidad) durante el mercado alcista que durante el bajista. El grado de estabilidad (Ej: previsibilidad) de la correlación Estados Unidos-Brasil es aproximadamente el mismo tanto en el mercado alcista como bajista. Hemos utilizado un análisis de simulación de impulso para estudiar las respuestas dadas por los cuatro mercados Latinoamericanos, para simular el choque en el mercado norteamericano. El choque provoca fuertes respuestas en los cuatro mercados de América Latina. Los mercados de Argentina y México muestran una respuesta mucho más fuerte en el mercado en alza que cuando está en baja. Sin embargo, los mercados brasileño y chileno muestran una respuesta mayor en el mercado en baja que cuando está en alza. El choque causa una turbulencia considerable en todos los mercados, que dura por un período más prolongada en el mercado en baja que en el mercado en alza. RESUMO. Neste trabalho, estudamos os movimentos conjuntos dos mercados de ações norte-americano, argentino, brasileiro, chileno e mexicano, durante a alta do mercado, no período de 12/10/1998 a 24/03/ 2000, e a baixa do mercado, no período de 24/03/2000 a 10/09/2000. Percebemos que estes cinco mercados estão intimamente relacionados e, por isso, há menos diversificação dos benefícios para os investidores internacionais durante a baixa do mercado do que durante a sua alta. Nossa descoberta, através da análise da correlação flutuante, indica que o coeficiente de correlação americano mais volátil é em relação ao Chile, tanto na alta quanto na baixa do mercado. O coeficiente de correlação com o México é mais estável (i.e., mais previsível) na alta do que na baixa do mercado. Contudo, tais coeficientes, em relação à Argentina e ao Chile, são menos estáveis (i.e., menos previsíveis) nas altas e baixas do mercado. O grau de estabilidade (i.e., de previsibilidade) do coeficiente de correlação americano e brasileiro é semelhante, em ambos os mercados. Utilizamos a análise de simulação de impulso para estudar as respostas dos quatro mercados da América Latina a um choque simulado no mercado americano. O choque causa respostas fortes nos quatro mercados latinos. Os mercados da Argentina e do México apresentam reações mais fortes no mercado em alta do que no mercado em baixa. Contudo, os mercados do Brasil e do Chile já apresentam uma reação mais forte no mercado em baixa do que no mercado em alta. O choque causa uma turbulência considerável em todos os mercados. A turbulência perdura mais na baixa do mercado do que em sua alta.

A Comparison of the Financial Characteristics of NAFTA and Latin American Manufacturing Firms

Comparing the financial characteristics of firms in different countries and different regions has been a popular research topic in finance. However, NAFTA and Latin American manufacturing firms have never been compared. In this paper, we undertake such a study with the MANOVA (Multivariate Analysis of Variance) method and with data drawn from the Research Insight/Global Vintage database in October 2015. Our findings indicate that NAFTA manufacturing firms have less liquidity risk, but more financial risk, compared with Latin American Manufacturing firms. NAFTA manufacturing firms have significantly higher returns on equity due to achieving higher returns on assets and using more financial leverage. Latin American manufacturing firms have more efficient inventory management. However, NAFTA manufacturing firms have more efficient accounts receivable management and total assets management.

A COMPARISON OF THE FINANCIAL CHARACTERISTICS OF U.S. AND EUROPEAN MANUFACTURING FIRMS

The U.S. and Germany rank #1 and #3, respectively, in the world, in terms of the total amount of international trade. U.S. and German firms compete with one another for a larger market share in other countries and in each other’s local markets. And yet, there are no published studies that compare the financial management practices of U.S. and German firms. In this paper, we make a contribution to the finance literature on this subject by comparing the financial characteristics of U.S. and German manufacturing firms. Our findings provide valuable insights for corporate financial managers and for investors who invest in these countries. Using a sample of 1166 firms, we find that the financial characteristics of U.S. manufacturing firms differ significantly from those of German manufacturing firms. MANOVA test results indicate that U.S. firms exhibit higher liquidity, lower debt, higher profitability, and lower total assets turnover. These findings are also supported by the logistic regression results. We suggest that better financial performance of U.S. firms could be attributed to more business-friendly employment laws and lower levels of unionization in the United States.

Co-Movements Of U.S. And European Stock Markets Before And After The 2008 Gloal Stock Market Crash

Abstract Empirical studies show that correlation between national stock markets increased and the benefits of global portfolio diversification decreased significantly after the global stock market crash of 1987. The 1987 and 2008 crashes are the two most important global stock market crashes since the 1929 Great depression. Although the effects of the 1987 crash on the comovements of national stock markets have been investigated extensively, the effects of the 2008 crash have not been studied sufficiently. In this paper we study this issue with a research sample that includes the U.S stock market and twenty European stock markets. We find that correlation between the twenty-one stock markets increased and the benefits of portfolio diversification decreased significantly after the 2008 stock market crash.