Victor Murinde

Exchange rate and stock price interactions in emerging financial markets: evidence on India, Korea, Pakistan and the Philippines

Interactions are investigated between exchange rates and stock prices in the emerging financial markets of India, Korea, Pakistan and the Philippines. The motivation is to establish the causal linkages between leading prices in the foreign exchange market and the stock market; the linkages have implications for the ongoing attempts to develop stock markets in emerging economies simultaneously with a policy shift towards independently floating exchange rates. Some recent econometric techniques are applied to a bivariate vector autoregressive model using monthly observations on the IFC stock price index and the real effective exchange rate over 1985:01-1994:07. The results show unidirectional causality from exchange rates to stock prices in all the sample countries, except the Philippines. This finding has policy implications; it suggests that respective governments should be cautious in their implementation of exchange rate policies, given that such policies have ramifications on their stock markets.

Finance and Development

In this valuable new book, a distinguished group of authors takes stock of the existing state of knowledge in the field of finance and the development process. Each chapter offers a comprehensive survey and synthesis of current issues. These include such critical subjects as savings, financial markets and the macroeconomy, stock market development, financial regulation, foreign investment and aid, financing livelihoods, microfinance, rural financial markets, small and medium enterprises, corporate finance and banking.

Financial development and economic growth in Singapore: demand-following or supply-leading?

Two competing hypotheses regarding financial development and economic growth are empirically investigated, in the context of supply-leading and demand-following finance. The focus is on Singapore as a country which has implemented financial restructuring strategies that, arguably, amount to a ‘supply-leading finance’ experiment. By drawing on some developments in economic theory over the last three decades, hypotheses are formulated within a statistical framework, namely a bivariate vector autoregressive (BVAR) model. A battery of econometric techniques are applied to test for stationarity, cointegration, exogeneity and Granger-causality. The evidence largely supports the supply-leading hypothesis only when broad monetary aggregates and a monetization variable are used as surrogates for financial development. It is concluded that there is a plausible case for those economies which intend to adopt a financial restructuring strategy driven by a supply-leading policy stance that involves enhanced monetizatio...

Regulatory lessons for emerging stock markets from a century of evidence on transactions costs and share price volatility in the London Stock Exchange

This paper draws regulatory lessons for emerging stock markets from an empirical study of the relationship between transactions costs and share price volatility in the London Stock Exchange. We concentrate our analysis on direct pecuniary costs of trading, namely transactions taxes (stamp duty) and brokerage charges, which derive directly from regulation. In a novel contribution to the transactions cost literature, we identify stock market performance with various measures of market volatility, and distinguish among market volatility, fundamental volatility and excess volatility; we also propose some simple ways of identifying the separate impact of transactions costs on these volatility measures. Our findings suggest that changes in transactions costs have a significant and dependable eAect on share price volatility but the sign of this eAect depends critically on the concept of volatility being measured. Among the important lessons for emerging stock markets is that transactions costs are an important factor in share market volatility and the regulatory regime therefore needs to take account of the impact of regulation on such costs. This is particularly important for those emerging stock markets that rely on stamp duty or other transactions taxes as a regulatory tool. ” 2000 Elsevier Science B.V. All rights reserved.

Modelling the volatility in East European emerging stock markets: evidence on Hungary and Poland

In this paper, stock market volatility in the East European emerging markets of Hungary and Poland is investigated using daily indexes. The results suggest the presence of non-linearity in the indexes through the BDSL statistic, while the presence of conditional heteroscedasticity is detected through LM tests. Conditional volatility is then modelled as a GARCH process; however, as measured by a GARCH-M model, this does not seems to be priced in the Hungarian and Polish stock markets. Moreover, the evidence rejects the Martingale hypothesis that future changes of stock prices in the two markets are orthogonal to past information. The well-known day-of-the-week effect, reflected in significantly positive Friday and negative Monday returns, does not seem to be present in these markets. While a marked decline in conditional volatility in the Polish market after June 1995 may be explained by appreciating Zloty exchange rates against the German Mark and increasing integration with developed markets, a similar (but less consistent) pattern between exchange rates (Hungarian against German and UK currencies) and conditional volatility is found for the Hungarian market.

The Effect of Financial Liberalization on Capital Flight in African Economies

Summary In this paper we assess the effects of financial liberalization on capital flight in African economies. A portfolio model, in which capital flight is one of the assets, is estimated on a sample of nine African countries for 1970–91. The estimation results suggest that financial liberalization induces a reduction in capital flight. After augmenting the model with submodels for the banking sector, the government sector and the external sector, we conduct simulation experiments involving an interest rate deregulation, a decrease in reserve requirements and a change in exchange rate policy. The simulation results show that capital flight is reduced by all the three financial liberalization measures. The effects, however, are very small. Considering both the estimation and simulation results, we conclude that financial liberalization policies are useful in attempts to reduce capital flight in African economies, but per se the policies may not be the panacea.

The Efficiency of Foreign and Domestic Banks in Central and Eastern Europe: Evidence on Economies of Scale and Scope

We model the efficiency of domestic and foreign banks in Central and Eastern Europe, in terms of economies of scale and scope. We estimate and test the model on a panel of 273 foreign and domestic banks located in nine European transition economies during 1995-99. The main findings are threefold. First, overall, banks in the sample economies exhibit a reasonable degree of efficiency. Second, we generally reject the hypothesis that foreign banks are more efficient than domestic banks in these economies. Third, foreign ownership is hardly an important factor in reducing the banks’ total costs.

How do Small Firms in Developing Countries Raise Capital? Evidence from a Large-Scale Survey of Kenyan Micro and Small-Scale Enterprises

We utilize a unique comprehensive dataset, drawn from the 1999 baseline survey of some 2000 micro and small-scale enterprises (MSEs) in Kenya. We analyze the financing behavior of these enterprises within the framework of a heterodox model of debt-equity and gearing decisions. We also study determinants of the success rate of loan applications. Our results emphasize three major findings. First, MSEs in Kenya obtain debt from a wide variety of sources. Second, debt-equity and gearing decisions by MSEs and their success rates in loan applications can all be understood by relatively simple models which include a mixture of conventional and heterodox variables. Third, and in particular, measures of the tangibility of the owners assets, and the owners education and training have a significant positive impact on the probability of borrowing and of the gearing level. These findings have important policy implications for policy makers and entrepreneurs of MSEs in Kenya.

The measurement and determinants of x-inefficiency in commercial banks in Sub-Saharan Africa

This paper uses the translog stochastic cost and profit frontier approach to measure the degree of x-inefficiency in a panel of 89 commercial banks drawn from nine Sub-Saharan African countries, covering the period 1992–99. The paper then models the determinants of x-inefficiency in terms of bank-specific factors and general macroeconomic variables. It is found that profit x-inefficiency is slightly higher than cost x-inefficiency, which suggests that revenue x-inefficiency is rather small. The evidence also shows that the degree of cost x-inefficiency is exacerbated by bad loans, high capital ratios and financial liberalisation. In contrast, it is shown that larger banks are more efficient and the level of foreign bank penetration reduces x-inefficiency. These findings have important implications for bank managers and regulators in Sub-Saharan Africa.

Flight Capital and its Reversal for Development Financing

In this paper, we review the theoretical and empirical literature on capital flight. First, we discuss the measurement of capital flight. Next, we provide information on the magnitude as well as the ‘burden’ of capital flight for a selected set of developing countries in four regions of the world (South Asia, East Asia, Sub-Saharan Africa and Latin America). Moreover, we review the literature on the determinants of capital flight and provide an overview of empirical studies that have analysed the determinants of capital flight. In the light of the discussion of these determinants, we assess the prospects for flight capital reversal. We conclude by proposing some policy measures to stem continued capital flight and induce capital flight reversal.