Luc Soenen

Asian Economic Integration and Stock Market Comovement

Using daily returns from 1988 to 1998, we investigate to what degree twelve equity markets in Asia are integrated with Japans equity market and examine the factors that affect the level of economic integration. We find that the equity markets of Australia, China, Hong Kong, Malaysia, New Zealand, and Singapore are highly integrated with the stock market in Japan. There is also evidence that these Asian markets become more integrated over time, especially since 1994. A higher import share as well as a greater differential in inflation rates, real interest rates, and gross domestic product growth rates have negative effects on stock market comovements between country pairs. Conversely, increased export share by Asian economies to Japan and greater foreign direct investment from Japan to other Asian economies contribute to greater comovement. Southern Finance Association and the Southwestern Finance Association.

Economic integration and stock market comovement in the Americas

Abstract Using daily returns from 1988 through 1999 for Argentina, Brazil, Chile, Mexico, and Canada, and from 1993 to 1999 for Colombia, Peru and Venezuela, we investigate to what degree these equity markets are integrated with the US equity market and examine the factors that affect the level of economic integration. We find a statistically significant high percentage of contemporaneous association between the eight equity markets of the Americas and the stock market in the United States. A high share of trade with the United States has a strong positive effect on stock market comovements. Conversely, increased bilateral exchange rate volatility and a higher ratio of stock market capitalization relative to that of the United States contribute to lower comovement.

Indicators of Successful Companies

Using monthly Compustat data for 478 companies covering the period 1982-1998, we investigate which factors discriminate between financially successful and less successful companies. Financial success is measured using three different methods, i.e., the Sharpe ratio, Jensens alpha, and EVA. We consider a total of 10 different company specific characteristics as potential indicators of superior performance. A binary logit model is applied to quantify the relationship between the individual firm characteristics and the probability that a particular measure of success will be greater or lower than the average for all firms considered. We also calculate the percentage correct prediction by the model for each measure of success. We find that especially large profitable firms with efficient working capital management and a certain degree of uniqueness regarding their business are the most successful companies.

Exposure to currency risk by US multinational corporations

Abstract Despite evidence that large US multinational corporations are hedging their exchange rate risk exposure, existing literature on the measurement of exchange rate risk does not give us a tool to measure the effect of such hedging activities of multinational firms. This paper revisited the measurement of exchange rate risk exposure using the cumulative translation adjustment as a trade-weighted dollar index faced by individual companies. We find that especially small multinational firms are exposed to foreign exchange risk and benefit from a weakening in the international value of the US dollar. The results also indicate that hedging activities by large firms are not so effective to eliminate exchange risk. Two industries in particular show a highly significant relation between changes in the cumulative translation account and equity returns, however, with an opposite sign, i.e. positive for electrical equipment and negative for primary metals.

The Interrelationship Between Macroeconomic Variables and Stock Prices-The Case of China

ABSTRACT Prior studies of industrialized countries have found that a definite relationship exists between the stock market returns and macroeconomic variables such as inflation and real output. This paper investigates the effects of changes in the consumer price index on industrial production and stock market returns for China. Six different types of Chinese shares are examined for the period 1994–1998. The results show a very significant positive relationship between inflation and real output. A positive and significant association is found between stock returns and real output in current periods. Inflation seems to have no impact on Chinese real stock returns. These relationships all hold for “B” shares, “H” shares and red chips. Chinas “A” share returns seem not to be impacted by either changes in domestic inflation or real industrial production.

EC economic and monetary integration: Implications for European equity investors

Robert Johnson, John Lindvall and Luc Soenen investigate the impact of continued economic and monetary integration within the European Community on the risk/return characteristics of its equity markets. Equity markets in different EC countries are becoming more similar in terms of risk and return. However, the risk of investing in EC equity markets is not decreasing over time. On the other hand, we find that currency risk has decreased and that the compounding effect of exchange rate risk magnifying stock market risk is decreasing. Despite the greater similarity of the different EC stock and currency markets in terms of risk and return characteristics, investors from EC countries can significantly reduce their risk by diversifying their equity investments across the range of EC country stock markets.

Foreign exchange management—A strategic approach

Abstract Changes in exchange rates affect the value of the firm because of the sensitivity of corporate cash flows to exchange rate fluctuations. Notwithstanding innovation in foreign exchange risk management, there are situations where hedging does not protect the firm against the adverse impact of unanticipated changes in exchange rates. This paper discusses a particular, although very common, case of economic exposure in which firms have continuous contractual cash flows denominated in a foreign currency showing a persistent appreciation or depreciation vis-a-vis the firms home currency. We present alternative strategic responses when hedging techniques are inadequate.

On the significance of the incremental returns from hedging international portfolios

Abstract This paper investigates whether hedging the currency risk associated with international portfolios diversified into established and emerging markets leads to significant incremental returns. From the empirical results, for the period August 1989 to December 1997, the ineffectiveness of hedging for generating superior returns could be explained by the low correlations among the observed markets and the presence of negative index/currency correlations in many assets. In the particular case of emerging markets, the predominance of positive index/currency correlations suggests that the currency risk could compound the risk posed by these markets beyond the power of a hedging strategy.

Stock market reaction to EC economic and monetary integration

The risk/return characteristics of world stock markets are examined for the period 1973-1990 and three sub-periods. From the perspective of the US investor, EC stock markets individually and collectively yield higher average rates of return but with higher variability than the US stock market (except for the sub-period 1979-1984). However, investment in a well-diversified portfolio of EC stocks earned marginally higher average returns with less risk than investing in the Japanese stock market (except for the sub-period 1979-1984). The evidence suggests that a strong dollar and deeper recession in Europe may have contributed to the poor performance of EC stock markets between 1979 and 1984.

The Jakarta Stock Exchange: Risk/Return Characteristics

lthough Indonesia established its first stock exchange in 1914 (Vereniging V O O ~ den Eflecten Handeel), it has only been since A the deregulation actions of 1987 and especially 1989 that the stock market has awakened. The value traded increased from