Vincent J. Hooper

Selecting Macroeconomic Variables as Explanatory Factors of Emerging Stock Market Returns

Emerging stock markets have been identified as being at least partially segmented from global capital markets. As a consequence, it has been argued that local risk factors rather than world risk factors are the primary source of equity return variation in these markets. This paper seeks to address the question of whether macroeconomic variables may proxy for local risk sources. We find moderate evidence to support this hypothesis. Further, we investigate the degree of commonality in exposures across emerging stock market returns using a principal components approach. We find little evidence of commonality when emerging markets are considered collectively, however at the regional level considerable commonality is found to exist.

Regionalism, Political Risk and Capital Market Segmentation in International Asset Pricing

This study examines the relationship between financial market segmentation and political risk. Financial economists have attributed market segmentation to factors such as foreign exchange risk, taxes, tariffs and capital controls whereas the influence of political risk has been largely ignored. It is discovered that markets are generally segmented on a regional basis. It is also found that there is a high correlation between political risk and capital market segmentation. However, some countries may appear to be integrated when not because their economies are affected by similar economic factors such as the price of commodities or level of economic development. These findings have profound implications for asset pricing. Multi-index models should be tested that incorporate a regional index, an economic development attribute, commodity factors and a political risk variable in order to price securities more effectively.

Regional Integration of Stock Markets in Latin America

This paper examines the trend towards regionalism upon stock market returns in Latin America. Average correlations with other countries in the region and with the world suggest that the Latin American stock markets have become more regionally integrated over the study period. This finding reflects the growing cooperation between Latin American countries since liberalisation in the early 1990s. Prior to liberalisation, Latin American stock market returns showed greater association with the more developed markets, particularly the USA, than with their closest neighbour. This may have been due to the high dependence upon debt from these developed countries. Analysis highlights the importance of stock market data in helping researchers understand and monitor the regional integration process in Latin America.

Regional Integration of National Stock Markets

The purpose of this paper is to examine the regional integration of national stock markets. Cluster analysis is utilised in order to determine whether returns generated in national stock markets form groupings. The results suggest that markets are segmented on a regional basis. This finding is consistent with the existence of trading blocs and regional integration through closer economic ties between countries. This study has policy relevant implications for international investors wishing to diversify their portfolios because it may be beneficial for them to diversify their investments across regions more efficiently than countries.

Optimal modelling frequency for foreign exchange volatility forecasting

For the major foreign exchange rates, it is found that the optimal modelling frequency of volatility is weekly for forecast horizons ranging from 1 week up to 1 month. Autoregressive modelling is based on realized volatility measures computed from 30 min returns.

Monthly Forecasts of Systematic Risk: An Evaluation

Recent advances in covariance and variance estimators coupled with improvements in the quality of intra-day data have made possible more precise measurement of beta (systematic risk). In this paper we examine the forecastability of monthly betas for Dow Jones stocks. The out-of-sample forecasting exercise conducted in our study results in a dramatic reduction of forecast error of beta on average by over 80%, relative to the industry standard of the constant model. This finding has vast implications for all aspects of finance as precise forecasting of the beta parameter is of crucial importance. Presented at the 2007 North Americian Summer Meetings of the Econometric Society at Duke University.

Volatility and Openness of Emerging Markets: Some Empirical Evidence

The purpose of this paper is to examine the relationship between the volatility of emerging stock markets (ESMs) and their degree of openness.

Exchange Rate and Expropriation Risk in Multinational Capital Budgeting: A Stochastic Calculus Approach

Multinational companies undertake their capital budgeting decisions within a harsh environment of volatile exchange rates and political risks as well as other factors. This paper develops a capital budgeting framework, by applying a geometric Brownian motion process to model the exchange rate behaviour and a Poisson process to reflect the arrival of an expropriation by a hostile government. A practical example of the stochastic model is given in this paper. The solution to the stochastic model could be used by multinational managers as a decision tool, especially for those companies where expropriation risk is a cause for concern.

Governance, Stock Market Risks and Appraisal Ratios

The purpose of this paper is to examine the effect of governance environments upon stock market risks and Appraisal ratios for developed and emerging stock markets over the time period January 1995 to December 2002. Using an augmented international capital asset pricing model (ICAPM) model and allowing for the control of risk factors, we find that governance environments have a significant influence on the total and idiosyncratic risks of stock markets, and subsequently their Appraisal ratios. The results have policy implications for government policy setters as improvements to governance environments may reduce the cost of capital. The results also have implications for active portfolio managers with investments in emerging markets.

Governance and Profitability around the World

The purpose of this paper is to examine the effect of governance environments upon aggregate dividend yield and earnings per share for developed and emerging stock markets over the time period January 1995 to December 2002. Using an augmented version of the dividend growth model and allowing for the control of risk factors, we find that governance environments have a significant influence upon dividend yield and earnings per share. The results have policy implications for government policy setters as improvements to governance environments may induce portfolio equity inflow, which is increasingly being seen as a driving force for economic growth.