Jack D. Glen

International Cross-listing and Order Flow Migration: Evidence from an Emerging Market

Policymakers in emerging markets are increasingly concerned about the consequences for the domestic equity market when companies list stock abroad. We show that the effects of cross-listing depend on the quality of intermarket information linkages. We investigate these issues with unique data from the Mexican equity market. The impact of cross-listing is complex-balancing the costs of order flow migration against the benefits of increased intermarket competition. These effects are exacerbated by equity investment barriers that induce segmentation of the domestic equity market. Consequently, the benefits and costs of cross-listing are not evenly spread over all classes of shareholders. Copyright The American Finance Association 1998.

Liquidity, Volatility, and Equity Trading Costs Across Countries and Over Time

Actual investment performance reflects the underlying strategy of the portfolio manager and the execution costs incurred in realizing those objectives. Execution costs, especially in illiquid markets, can dramatically reduce the notional return to an investment strategy. This paper examines the interactions between cost, liquidity and volatility, and analyses their determinants using panel data for 42 countries from September 1996 to December 1998. We document wide variation in trading costs across countries; emerging markets, in particular, have significantly higher trading costs even after correcting for factors such as market capitalization and volatility. We analyse the inter-relationships between turnover, equity trading costs and volatility, and investigate the impact of these variables on equity returns. In particular, we show that increased volatility, acting through costs, reduces a portfolios expected return. However, higher volatility reduces turnover also, mitigating the actual impact of higher costs on returns. Further, turnover is inversely related to trading costs, providing a possible explanation for the increase in turnover in recent years. The results demonstrate that the composition of global efficient portfolios can change dramatically when cost and turnover are taken into account. Copyright 2001 by Blackwell Publishers Ltd.

Real exchange rates in the short, medium, and long run

Abstract This paper uses long-horizon autocorrelations and variance ratio statistics to test for long-term mean reversion in real exchange rates. Unlike most previous tests of this hypothesis, the tests do reject a random walk for monthly data in the post-Bretton Woods era; however, the statistics indicate that positively-correlated innovations, rather than mean reversion, are the source of the rejection. Tests using annual data for the twentieth century also reject the random walk. In this case, however, the rejection can be attributed to mean reversion and confirms that PPP is a long-term phenomenon.

Persistence of profitability and competition in emerging markets

Abstract This paper reports on time-series analyses of the persistence of profitability of firms in emerging markets. Its central result is that there is less persistence in developing than in advanced economies. The implications for the intensity of competition in emerging markets are examined.

Country and Currency Risk Premia in an Emerging Market

The magnitude and determinants of credit and currency risks are topics of considerable importance. This paper uses data on peso- and dollar-denominated debt issued by the Mexican government to identify currency and country risk premia. We show that shocks in equity and debt market returns translate into long-term increases in the premium demanded by investors with respect to currency and country factors. Country and currency premia help explain equity returns and closed-end fund discounts. Additional evidence is provided showing that investors did not anticipate the magnitude or timing of the currency devaluation of December 1994 and the subsequent financial crisis.

Some international evidence on stock prices as leading indicators of economic activity

Most asset pricing theories suggest that asset prices are forward looking and reflect market expectations of future earnings. By aggregating across companies, aggregate market prices may then be used as leading indicators of future growth in aggregate income, as well as its constituent components. Data are compiled from 23 countries, including 15 developing countries, in order to examine the ability of stock market prices to predict future economic growth in income, consumption and investment. It is found that stock prices generally have predictive ability, but with substantial variation across countries. Moreover, stocks are substantially better leading indicators of investment than either GDP or consumption. Despite their value as leading indicators, however, stock prices do not generally increase forecasting ability as measured by root mean squared error in out-of-sample forecasting equations.

An introduction to the microstructure of emerging markets

Most discussions of security markets and asset pricing take trading system design as exogenous and as playing a relatively minor role in the overall pricing process. But more recently, interest in market microstructure has revealed the significant role that it can play in both market success and individual security pricing. Through its effects on market liquidity and the cost of trading in particular, microstructure can make a market more or less attractive, thereby encouraging market participation. For investors unaccustomed to dealing with international markets, the diversity in microstructure that exists, especially in the emerging markets, may come as a surprise. This paper highlights that diversity by examining the microstructure of seven securities markets in six countries. Each is different but many similarities also exist. Particularly noteworthy is the trend toward automation, a reflection of the interest in market innovation that characterizes these markets.

Business Cycle Effects on Commercial Bank Loan Portfolio Performance in Developing Economies

This paper studies the business cycle effects on the performance of commercial bank loan portfolios across major developing economies in the period 1996-2008. We measure loan performance via loan loss provisions (that is, recognized expenses related to expected losses in bank income statements). Our results indicate that while economic growth is the main driver of loan portfolio performance, interest rates have second-order effects. Furthermore, we find the relationship between loan loss provisions and economic growth to be highly non-linear only under extreme economic stress: GDP growth needs to decline by more than 6 percentage points (pp, in absolute terms) in order to generate an increase in loan loss provisions equivalent to the median emerging market bank profitability; while a decline of more than 10 pp in growth implies significant capital losses, of at least 20 percent, for the median emerging market bank. In addition, we find higher loan loss provisions are associated with private sector leverage, poor loan portfolio quality, and lack of banking system penetration and capitalization.

Shareholder Value Maximisation, Stock Market and New Technology: Should the US Corporate Model be the Universal Standard? 1

Abstract In 1992 a blue‐ribbon group of US economists led by Michael Porter concluded that the US stock market‐based corporate model was misallocating resources and jeopardising US competitiveness. The faster growth of US economy since then and the supposed US lead in the spread of information technology has brought new legitimacy to the stock market and the corporate model, which is being hailed as the universal standard. Two main conclusions of the analysis presented here are: (a) there is no warrant for revising the blue‐ribbon group’s conclusion; and (b) even US corporations let alone developing country ones would be better off not having stock market valuation as a corporate goal.

Capital Structure, Rates of Return and Financing Corporate Growth: Comparing Developed and Emerging Markets, 1994-00

Firm level data from financial statements for nearly 8,000 listed companies in 22 emerging and 22 developed countries over the period 1994-00 are examined. Capital structure, asset structure, rates of return and financing patterns are compared across countries and over time. Generally, there are as many similarities as differences between the two groups. The differences include lower levels of debt to finance assets and lower levels of current assets in emerging markets compared with developed countries. Returns on assets, expressed in local currency, are comparable in the two groups but appear more volatile in emerging markets. Capital Structure, Rates of Return and Financing Corporate Growth: Evidence from Developed and Emerging Markets, 1994-00