Professional Documents
Culture Documents
• It discusses both the primary sale of new common stock by corporations to initial
investors and how previously issued common stock is traded between investors in
the secondary markets.
A Statistical Perspective
• There are several tiny national equity markets in Latin America, Europe, the Middle
East, and Africa.
• Many of the national equity markets in Latin America (Brazil and Mexico) and in
Asia (China, India, and Taiwan) have market capitalizations far in excess of the size
of some of the smaller equity markets in the developed countries.
A Statistical Perspective
Measure of Liquidity
• A measure of liquidity for a stock market is the turnover ratio; that is, the ratio of
stock market transactions over a period of time divided by the size, or market
capitalization, of the stock market.
• Generally, the higher the turnover ratio, the more liquid the secondary stock
market, indicating ease in trading.
• In 29 equity markets of developed countries for the five years beginning with 2008
had very high turnover ratios, with the great majority in excess of 50 percent
turnover per year.
• For the majority of 35 emerging countries, the turnover ratio was less in 2012 than
it was in 2008, indicating poor liquidity in most emerging equity markets.
A Statistical Perspective
• The secondary equity markets of the world serve two major purposes.
1. Marketability. Firms would have a difficult time attracting buyers in the primary
market without the marketability provided through the secondary market.
2. Share valuation. Competitive trading between buyers and sellers in the secondary
market establishes fair market prices for existing issues.
Market Structure, Trading Practices, and Costs
2. A limit order is an order away from the market price that is held in a limit order
book until it can be executed at the desired price.
Market Structure, Trading Practices, and Costs
• Both the OTC and the exchange markets in the United States are continuous
markets where market and limit orders can be executed at any time during
business hours.
• In recent years, most national stock markets have become automated for at least
some of the issues traded on them.
Market Structure, Trading Practices, and Costs
Market Characteristics
Equity Trading Public Orders Order Flow Example
System
Dealer Trade with dealer Continuous NASDAQ OTC
Agency Agent assists with Continuous or NYSE
matching of public periodic specialist
orders system
(continuous)
Old Paris
Bourse (non-
continuous)
Fully Electronic matching Continuous Toronto Stock
automated of public orders Exchange
Cross-Listing of Shares
• Cross-listing refers to a firm having its equity shares listed on one or more foreign
exchanges, in addition to the home country stock exchange.
Cross-Listing of Shares
3. Cross-listing brings the firm’s name before more investor and consumer groups.
Local consumer (investors) may more likely become investors in (consumers of)
the company’s stock (products) if the company’s stock is (products are) available.
4. Cross-listing into developed capital markets with strict securities regulations and
information disclosure requirements may be seen as a signal to investors that
improved corporate governance is forthcoming.
5. Cross-listing may mitigate the possibility of a hostile takeover of the firm through
the broader investor base created for the firm’s shares.
• In general, only sponsored ADRs trade on NASDAQ or the major stock exchanges.
Trading in International Equities
• GRSs are fully fungible-a GRS purchased on one exchange can be sold on another.
• Kao, Wenchi, Wei, and Vu (1991) found that an internationally diversified portfolio
of ADRs outperforms both a U.S. stock market and a world stock market
benchmark on a risk-adjusted basis.
• Jayaraman, Shastri, and Tando (1993) found positive abnormal performance of the
underlying security on the initial listing date. Additionally, they found an increase in
the volatility of returns of the underlying stock.
Trading in International Equities
• Berkman and Nguyen (2010) found little evidence that cross-listing results in
significant improvement in domestic liquidity.
• Abdallah and Ioannidis (2010) results do not support the bonding theory’s
prediction that cross-listing signals the firm’s commitment to protect minority
shareholders’ interests and thus increase the value of the firm by reducing the
required rate of return.
• Doidge, Karolyi, and Stulz (2010) concluded that firms that delist and leave U.S.
markets do so because they do not foresee the need to raise new external funds.
International Equity Market Benchmarks
• Each year S&P publishes its Global Stock Markets Factbook, which provides a
variety of statistical data on both emerging and developed country stock markets.
• The Financial Times reports values in local currency of the major stock market
indexes of the national exchanges or markets from various countries in the world
• iShares MSCI are baskets of stocks designed to replicate various MSCI stock
indexes.
• Some funds may not perfectly replicate their respective MSCI index. Nevertheless,
iShares are a low-cost, convenient way for investors to hold diversified investments
in several different countries.
Factors Affecting International Equity Returns
Macroeconomic Factors
• Solnik (1984) found that international monetary variables had only weak influence
on equity returns in comparison to domestic variables.
Exchange Rates
• Adler and Simon (1986) found that changes in exchange rates generally explained a
larger portion of the variability of foreign bond indexes than foreign equity indexes,
but that some foreign equity markets were more exposed to exchange rate changes
than were the respective foreign bond markets.
• Eun and Resnick (1988) found that the cross-correlations among major stock
markets and exchange markets are relatively low, but positive.
• Gupta and Finnerty (1992) concluded that exchange risk is generally not priced.
Factors Affecting International Equity Returns
Industrial Structure
• Roll (1992) concluded that the industrial structure of a country was important in
explaining a significant part of the correlation structure of international equity
index returns. He also found that industry factors explained a larger portion of
stock market variability than did exchange rate changes.
• Eun and Resnick (1984) found that the pairwise correlation structure of
international security returns could be better estimated from models that
recognized country factors rather than industry factors.
• Heston and Rouwenhorst (1994) concluded “that industrial structure explains very
little of the cross-sectional difference in country return volatility, and that the low
correlation between country indexes is almost completely due to country specific
sources of variation.