Thomas Lagoarde-Segot

Capital Market Integration in the Middle East and North Africa

This paper studies capital market integration in Middle Eastern and North African (MENA) countries and its implications for international portfolio investment allocation. Starting with four cointegration methodologies, we significantly reject the hypothesis of a stable, long-run bivariate relationship between each of these markets and the European Monetary Union (EMU), the United States, and a regional benchmark. This indicates the existence of significant diversification opportunities for three categories of investors (EMU, world, and regional investors). A recursive analysis based on Barari (2004) suggests that recently, the MENA markets have started to move toward international financial integration. Investigating the effect of selected financial, economic, and political events on such a process, we extend the methodology and find that the markets react heterogeneously to the different categories of shocks. They should therefore not be treated as a bloc for global allocation purposes. Finally, after adjusting the integration levels by relative market capitalization, Israel and Turkey are the most promising markets in the region, followed by Egypt, Jordan, and Morocco. Tunisia and Lebanon seem to be lagging behind.

Financial Reforms and Time-Varying Microstructures in Emerging Equity Markets

This paper seeks to investigate the impact of financial reforms on time-varying microstructures in emerging equity markets. We develop annual indicators of informational efficiency, market volatility and transaction costs, using daily data for a panel of 28 emerging markets over the 1996-2007 period. We then analyze the impact of insider trading regulations, trading system automation and accounting standardization on microstructures through a set of panel regressions controlling for financial development and simultaneous reforms. Our results suggest that emerging market microstructures are affected by economic and political context, are strongly related to one another and depend on specific institutional reforms.

Shift-contagion Vulnerability in the MENA Stock Markets

As part of a broader financial development reform agenda, the Middle East and North Africa (MENA) countries have successfully expanded and revitalised their stock markets over the last decade. Whereas previous contributions have investigated efficiency, international integration and portfolio diversification opportunities, very little is known about these markets’ vulnerability to external financial crises. In this paper, we investigate shift-contagion to the MENA region using a comprehensive battery of econometric tests for a number of different crises episodes: the 1997 Asian crisis, the 1998 Russian virus and its Brazilian sequel, the 2000 Turkish collapse, the 9/11 turmoil, the 2001 Argentinean crisis, the 2002 Enron/WorldCom scandal and the 2007–09 global financial crisis. We found that Turkey, Israel and Jordan were the most vulnerable markets over the 1997–2009 period, followed by Tunisia, Morocco, Egypt and Lebanon. Our results also highlight heterogeneous but increasing levels of sensitivity to external financial shocks, especially during the recent global financial crisis. From a financial point of view, this suggests that MENA-based diversification strategies may be relatively inefficient during periods of global turmoil. From an economic point of view, our results suggest that stock market development also involves potential destabilisation costs. This issue should be acknowledged and addressed by policymakers if these countries are to ensure a smooth transition towards international financial integration.

Financialization and information technology: themes, issues and critical debates – part I

S ince the mid-1980s, the growth of computerization in financial markets has been significant. Technological advances have changed the economics of finance and banking. The extant literature shows how the trading process has become increasingly automated, from order entry to trading venue to the back office (Kirilenko and Lo, 2013). Despite vast technological changes over several decades, there are relatively few studies in information systems and management scholarship on the transformation of financial trading and markets which embrace wider issues of the positive and negative aspects of financialized economies (Starkey, 2015). Studies published prior to the financial crisis of 2008 examine topics including, information technology and time-based competition in financial markets (Dewan and Mendelson, 1998), artefacts used in electronic trading and banking (Barrett and Walsham, 1999; Clemons and Weber, 1996) and asymmetric information and insider trading (Marsden and Tung, 1999). Following the financial meltdown, research has considered investor competence and trading (Graham et al., 2009), experimentation in financial markets (Massa and Simonov, 2009), financial objects in investment banking (Muniesa et al., 2011) and regulatory compliance (Bamberger, 2009; Gozman and Currie, 2014). This special issue on financialization and information technology is organized in two parts, with the first introducing themes, issues and critical debates, and the second, discussing the importance of multi-paradigmatic approaches to finance and IT. The issue has three objectives. First, it combines scholarship from social science disciplines (finance, information systems, political economy) on complex theoretical, empirical and practical issues and debates within financialization, in which multiple actors interact via different levels and units of analysis (Krippner, 2005). Second, it situates financialization in the context of financial innovation and technology. More specifically, it considers how technology mediates and shapes financial markets in periods of stability and crisis. Third, it recommends more multidisciplinary theoretical and empirical work to distinguish accounts which treat financialization as a descriptive variable or as a causal variable with wider implications for markets, firms and investors (Casey, 2012; Lapavitsas, 2011). Part I begins with an examination of themes, issues and critical debates in the financialization literature. It then gives examples of how scholars have identified information technology as playing an important role in financial markets and in financialization. This section distinguishes financial innovation from technological innovation – two terms often conflated in the social sciences. A brief overview is then given on methodological considerations to note that correlation and causality require greater transparency in financialization studies which sometimes confuse outcomes as being the direct result of policy decisions or technological change. The editorial continues with a brief discussion on the criticality of problematizing financialization as a phenomenon which requires more refined definitions and disciplinary integration. Finally, a brief overview is given of each of the five papers featured in this issue.

The Contradiction between the Time Value of Money and Sustainability

Abstract Purpose The “time value of money principle,” a building block of finance theory and practice, states that money today is worth more than money in the future. In this chapter, we argue that this principle is not consistent with intergenerational equity or sustainability. Methodology/approach We demonstrate that standard capital budgeting negatively affects sustainability by presenting two numerical examples and by discussing the role of financial markets in the time value of money and the discount rate. We then discuss Silvio Gesell’s (1862–1930) concept of Freigeld as a possible alternative framework for a “socially optimal” discount rate. Findings We show that the time value of money principle, as employed in standard capital budgeting techniques, tends to reject sustainable projects (that only break even in the long run) and accept unsustainable projects (that break even in the short term but entail significant long-term negative externalities). We find that fiat currencies offer interesting perspectives in the context of sustainability. Research implications We show that money, interest rates and investment valuation techniques are not merely technical tools, but have important institutional, social, and political attributes. Taken together with current global demands for sustainability, this observation could justify a new research agenda seeking to redefine current capital budgeting techniques. Practical/social implications We stress that the “time value of money principle” should not be viewed as a technical tool, but rather, as a social and political construct. We argue that the principle needs to be reconsidered given the current global sustainability crisis. Originality/value The economics literature considers that externalities indicate a market failure, to which policy makers should respond by introducing optimal tax incentives and regulation. At the same time, the management studies literature has proposed a set of initiatives to align corporate governance with sustainability principles. This chapter examines an issue that concerns both these literatures, that is, the relationship between sustainability and the time value of money.

Pandemics of the Poor and Banking Stability

We first develop a theoretical model that shows that the likelihood of a collapse of the banking industry of a developing country increases, as the joint prevalence of large pandemics such as AIDS and malaria increases. We also show that the optimal bank reserves increase as the prevalence increases. In the empirical part of the paper, we consider a large dataset of developing countries, and we exhibit a causality effect from combined prevalence to deposit turnover, as well as causality effect from an increase of combined prevalence to an increase in bank reserves. Those empirical facts therefore support our theoretical findings.

Equity Markets and Economic Development: What Do We Know?

The objective of this paper is to review the transmission mechanisms uniting equity market development and economic growth in developing countries. We find that the theoretical impact of equity markets is ambiguous. At the domestic level, the allocation function of equity markets appears conditioned by the extent of informational efficiency. Turning to international linkages, theoretical models suggest that equity market integration lowers the cost of capital, increases financial vulnerability and has a mixed impact on capital flows. Taking this into account, two conclusions arise. First, equity market development policies should focus on reaching and maintaining adequate levels of institutional transparency. Second, the optimal degree of international integration depends on the society’s preference between international accessibility and domestic stability.

The Contradiction of the Time Value of Money and Sustainability

The time value of money principle states that money today is worth more than money in the future if no interest is paid as compensation. This principle is not consistent with inter-generational equity or sustainability. Indeed, we show in this paper that the time value of money principle combined with commonly used capital budgeting techniques tend to reject potentially sustainable projects that only break even in the long run and accept unsustainable projects that break even in the short term but entail significant negative externalities in the long term. We further argue that the separation of ownership and management and the dispersion of ownership leads to a lack of commitment among equity holders and aggravates the bias towards short-term and potentially unsustainable projects.