Return and volatility linkages between the S&P 500 and emerging stock markets in Eastern Europe

The aim of this thesis is to research mean return spillovers as well as volatility spillovers from the S&P 500 stock index in the USA to selected stock markets in the emerging economies in Eastern Europe between 2002 and 2014. The sample period has been divided into smaller subsamples, which enables taking different market conditions as well as the unification of the World’s capital markets during the financial crisis into account. Bivariate VAR(1) models are used to analyze the mean return spillovers while the volatility linkages are analyzed through the use of bivariate BEKK-GARCH(1,1) models. The results show both constant volatility pooling within the S&P 500 as well as some statistically significant spillovers of both return and volatility from the S&P 500 to the Eastern European emerging stock markets. Moreover, some of the results indicate that the volatility spillovers have increased as time has passed, indicating unification of global stock markets.

The Market Behavior of Emerging Stock Markets in Europe

This study investigates the over and underreaction effects in nine emerging stock markets of Europe. Especially, the possible behavioral aspects behind them are an area of interest. These aspects would link them strongly to behavioral finance. Second, our aim is to provide more evidence of the similar or dissimilar behavior in general among these countries. Third, the possibility to gain abnormal returns from these markets is also under investigation. Data from nine emerging stock market indexes in Europe is gathered from January 1, 1998 to January 1, 2008 to find answers to the stated questions. Studies for the over and underreaction effects are done using a variant of the event study methodology which in this case includes two different calculation methods for the expected returns. Studies are performed using 60 day time intervals. The results between the two different methods used are relatively similar concerning the over and underreaction effects. Another of the methods, however, suggests there to be behavioral aspects behind the effects interpreted. On the other hand, the another method does not support this suggestion. However, a conclusion can be made that the factors driving these countries' behavior are related to their geographical location and to the fact that they are emerging countries.

Russian Venture Capital Markets

Tämän työn tarkoituksena on arvioida riskipääomasijoittamisen kehitystä ja kasvua Venäjällä, sekä antaa kuva siihen vaikuttavista tekijöistä. Se myös arvioi Venäjän valtion toimintaa niin säätelijänä, kuin myös itsenäisenä sijoittajana. Saavutetut tulokset perustuvat haastatteluihin ja olemassa olevien tilastojen analysointiin. Vuoden 1998 rupla kriisin jälkeen riskipääomasijoittaminen lähti kasvuun joka on jatkunut tasaisella rauhallisella tahdilla. Alueellisista riskipääomarahastoista on siirrytty myös yksityisrahoitteisiin ja yksityishallinnoituihin rahastoihin omine kohde aloineen ja portfolioineen. Silti markkinat ovat säilyneet kyllästymättöminä. Kuluttajavetoiset toimialat ovat keränneet eniten investointeja talouden ja ostovoiman kasvusta johtuen. Alueellisesti Moskova erottuu sijoituskohteena, muiden suurempien kasvukeskusten seuratessa perässä. Venäjällä on vielä paljon heikkouksia jotka vaikuttavat sen houkuttelevuuteen sijoittajan näkökulmasta. Heikot instituutiot ja lainsäädäntö yhdistettynä riskipääomasijoittamisen luonteeseen tekevät Venäjästä arvaamattoman markkina-alueen. Se kuitenkin tarjoaa menestyville sijoittajille korkeat tuotot. Nähtäväksi jää kuinka valtion toiminta vaikuttaa markkinoiden kehitykseen lyhyellä ja pitkällä tähtäimellä, ja kuinka se onnistuu kehittämään Venäjän yleistä kilpailukykyä globaaleilla markkinoilla.

Interdependence of Emerging Eastern European stock markets

One of the main developments in the global economy during the past decades has been the growth of emerging economies. Projections for their long-term growth, changes in the investment climate, corporate transparency and demography point to an increasing role for these emerging economies in the global economy. Today, emerging economies are usually considered as financial markets offering opportunities for high returns, good risk diversification and improved return-to-risk ratios. However, researchers have noted that these advantages may be in decline because of the increasing market integration. Nevertheless, it is likely that certain financial markets and specific sectors will remain partially segmented and somewhat insulated from the global economy for the year to come. This doctoral dissertation investigates several stock markets in Emerging Eastern Europe (EEE), including the ones in Russia, Poland, Hungary, the Czech Republic, Bulgaria and Slovenia. The objective is to analyze the returns and financial risks in these emerging markets from international investor’s point of view. This study also examines the segmentation/integration of these financial markets and the possibilities to diversify and hedge financial risk. The dissertation is divided into two parts. The first includes a review of the theoretical background for the articles and a review of the literature on EEE stock markets. It includes an overview of the methodology and research design applied in the analysis and a summary of articles from the second part of this dissertation and their main findings. The second part consists of four research publications. This work contributes to studies on emerging stock markets in four ways. First, it adds to the body of research on the pricing of risk, providing new empirical evidence about partial stock market segmentation in EEE. The results suggest that the aggregate emerging market risk is a relevant driver for stock market returns and that this market risk can be used to price financial instruments and forecast their performance. Second, it contributes to the empirical research on the integration of stock markets, asset prices and exchange rates by identifying the relationships between these markets through volatility and asset pricing. The results show that certain sectors of stock markets in EEE are not as integrated as others. For example, the Polish consumer goods sector, the Hungarian telecommunications sector, and the Czech financial sector are somewhat isolated from their counterparts elsewhere in Europe. Nevertheless, an analysis of the impact of EU accession in 2004 on stock markets suggests that most of the EEE markets are becoming increasingly integrated with the global markets. Third, this thesis complements the scientific literature in the field of shock and volatility spillovers by examining the mechanism of spillover distribution among the EU and EEE countries. The results illustrate that spillovers in emerging markets are mostly from a foreign exchange to the stock markets. Moreover, the results show that the effects of external shocks on stock markets have increased after the enlargement of the EU in 2004. Finally, this study is unique because it analyzes the effects of foreign macroeconomic news on geographically closely related countries. The results suggest that the effects of macroeconomic announcements on volatility are significant and have effect that varies across markets and their sectors. Moreover, the results show that the foreign macroeconomic news releases, somewhat surprisingly, have a greater effect on the EEE markets than the local macroeconomic news. This dissertation has a number of implications for the industry and for practitioners. It analyses financial risk associated with investing in Emerging Eastern Europe. Investors may use this information to construct and optimize investment portfolios. Moreover, this dissertation provides insights for investors and portfolio managers considering asset allocation to protect value or obtain higher returns. The results have also implications for asset pricing and portfolio selection in light of macroeconomic news releases.

Risk-return trade-off and autocorrelation

A trade-off between return and risk plays a central role in financial economics. The intertemporal capital asset pricing model (ICAPM) proposed by Merton (1973) provides a neoclassical theory for expected returns on risky assets. The model assumes that risk-averse investors (seeking to maximize their expected utility of lifetime consumption) demand compensation for bearing systematic market risk and the risk of unfavorable shifts in the investment opportunity set. Although the ICAPM postulates a positive relation between the conditional expected market return and its conditional variance, the empirical evidence on the sign of the risk-return trade-off is conflicting. In contrast, autocorrelation in stock returns is one of the most consistent and robust findings in empirical finance. While autocorrelation is often interpreted as a violation of market efficiency, it can also reflect factors such as market microstructure or time-varying risk premia. This doctoral thesis investigates a relation between the mixed risk-return trade-off results and autocorrelation in stock returns. The results suggest that, in the case of the US stock market, the relative contribution of the risk-return trade-off and autocorrelation in explaining the aggregate return fluctuates with volatility. This effect is then shown to be even more pronounced in the case of emerging stock markets. During high-volatility periods, expected returns can be described using rational (intertemporal) investors acting to maximize their expected utility. During lowvolatility periods, market-wide persistence in returns increases, leading to a failure of traditional equilibrium-model descriptions for expected returns. Consistent with this finding, traditional models yield conflicting evidence concerning the sign of the risk-return trade-off. The changing relevance of the risk-return trade-off and autocorrelation can be explained by heterogeneous agents or, more generally, by the inadequacy of the neoclassical view on asset pricing with unboundedly rational investors and perfect market efficiency. In the latter case, the empirical results imply that the neoclassical view is valid only under certain market conditions. This offers an economic explanation as to why it has been so difficult to detect a positive tradeoff between the conditional mean and variance of the aggregate stock return. The results highlight the importance, especially in the case of emerging stock markets, of noting both the risk-return trade-off and autocorrelation in applications that require estimates for expected returns.

Testing Weak-Form Efficiency of the Chinese Stock Market

Tämän tutkielman tavoitteena on tarkastella Kiinan osakemarkkinoiden tehokkuutta ja random walk -hypoteesin voimassaoloa. Tavoitteena on myös selvittää esiintyykö viikonpäiväanomalia Kiinan osakemarkkinoilla. Tutkimusaineistona käytetään Shanghain osakepörssin A-sarjan,B-sarjan ja yhdistelmä-sarjan ja Shenzhenin yhdistelmä-sarjan indeksien päivittäisiä logaritmisoituja tuottoja ajalta 21.2.1992-30.12.2005 sekä Shenzhenin osakepörssin A-sarjan ja B-sarjan indeksien päivittäisiä logaritmisoituja tuottoja ajalta 5.10.1992-30.12.2005. Tutkimusmenetelminä käytetään neljä tilastollista menetelmää, mukaan lukien autokorrelaatiotestiä, epäparametrista runs-testiä, varianssisuhdetestiä sekä Augmented Dickey-Fullerin yksikköjuuritestiä. Viikonpäiväanomalian esiintymistä tutkitaan käyttämällä pienimmän neliösumman menetelmää (OLS). Testejä tehdään sekä koko aineistolla että kolmella erillisellä ajanjaksolla. Tämän tutkielman empiiriset tulokset tukevat aikaisempia tutkimuksia Kiinan osakemarkkinoiden tehottomuudesta. Lukuun ottamatta yksikköjuuritestien saatuja tuloksia, autokorrelaatio-, runs- ja varianssisuhdetestien perusteella random walk-hypoteesi hylättiin molempien Kiinan osakemarkkinoiden kohdalla. Tutkimustulokset osoittavat, että molemmilla osakepörssillä B-sarjan indeksien käyttäytyminenon ollut huomattavasti enemmän random walk -hypoteesin vastainen kuin A-sarjan indeksit. Paitsi B-sarjan markkinat, molempien Kiinan osakemarkkinoiden tehokkuus näytti myös paranevan vuoden 2001 markkinabuumin jälkeen. Tutkimustulokset osoittavat myös viikonpäiväanomalian esiintyvän Shanghain osakepörssillä, muttei kuitenkaan Shenzhenin osakepörssillä koko tarkasteluajanjaksolla.

Financial Slack and Bidding Firms’ Takeover Announcement Stock Returns – an Event Study

Despite the fact that the literature on mergers and acquisitions is extensive, relatively little effort has been made to examine the relationship between the acquiring firms’ financial slack and short-term post-takeover announcement abnormal stock returns. In this study, the case is made that the financial slack of a firm is not only an outcome of past business and financing activities but it also may affect the quality of acquisition decisions. We will hypothesize that the level of financial slack in a firm is negatively associated with the abnormal returns following acquisition announcements because slack reduces managerial discipline over the use of corporate funds and also because it may give rise to managerial self-serving behavior. In this study, financial slack is measured in terms of three financial statements ratios: leverage ratio, cash and equivalents to total assets ratio and free cash flow to total assets ratio. The data used in this paper is collected from two main sources. A list comprising 90 European acquisition announcements is retrieved from Thomson One Banker database. The stock price data and financial statements information for the respective firms is collected using Datastream. Our empirical analysis is two-fold. First, we conduct a two-sample t-test where we find that the most slack-rich firms experience lower abnormal returns than the most slack-poor firms in the event window [-1, +1], significant at 5% risk level. Second, we perform a cross sectional regression for sample firms using three financial statements ratios to explain cumulative abnormal returns (CAR). We find that leverage shows a statistically significant positive relationship with cumulative abnormal returns in event window [-1; +1] (significance 5%). Moreover, cash to total assets ratio showed a weak negative relationship with CAR (significant at 10%) in event window [-1; +1]. We conclude that our hypothesis for the inverse relationship between slack and abnormal returns receives empirical support. Based on the results of the event study we get empirical support for the hypothesis that the capital markets expect the acquisitions undertaken by slack-rich firms to more likely be driven by managerial self-serving behavior and hubris than do those undertaken by slackpoor firms, signaling possible agency problems and behavioral biases.

Exchange rate volatility and the use of foreign currency derivatives: Impact of 2008 global financial crisis

This thesis examines the impact of foreign exchange rate volatility to the extent of use of foreign currency derivatives. Especially the focus is on the impacts of 2008 global financial crisis. The crisis increased risk level in the capital markets greatly. The change in the currency derivatives use is analyzed by comparing means between different periods and in addition, by linear regression that enables to analyze the explanatory power of the model. The research data consists of financial statements figures from fiscal years 2006-2011 published by firms operating in traditional Finnish industrial sectors. Volatilities of the chosen three currency pairs is calculated from the daily fixing rates of ECB. Based on the volatility the sample period is divided into three sub-periods. The results suggest that increased FX market volatility did not increase the use foreign currency derivatives. Furthermore, the increased foreign exchange rate volatility did not increase the power of linear regression model to estimate the use foreign currency derivatives compared to previous studies.

Crowdfunding as a new funding alternative for early stage start-ups

Attracting outside capital is a common problem for start-up companies. Capital markets define the funding options for companies and firms which suffer the most from these capital market imperfections are small start-up companies. Therefore it is important to study any new funding model which can offer a new solution to this inefficiency of capital markets. This study explains the traditional funding models for start-ups such as founders, friends & family, banks, business angels and venture capitalist. After giving background to traditional start-up funding this study delves into crowfunding (CF) and introduces it as a new funding method. The objective of the thesis is to answer one broad research question: Why and how should start-up companies use CF as an alternative funding method? To properly delve into this, this question has the following sub-questions: What kind of funding alternatives do start-up companies have? What are the pros and cons of CF compared to other funding options? How can start-ups benefit from CF? This study gives background on the rise of CF and the reasons why this new model is needed. Author will explain the different components of CF such as platforms, crowdfunders and projects. Also benefits and challenges of the crowdfunding model are investigated. As a new funding model CF has had to clear out many obstacles from its way. These are, for example, legal and regulatory issues as well education of crowd investors to understand this new investment option. . Start-up entrepreneurs can gain valuable insight from this study. The author has attempted to form best practices and guidelines of how to operate in the CF environment. This study was conducted by performing expert interviews, collecting data from previous studies and performing a content analysis of successful crowdfunding cases. Main findings from the study were that CF has huge potential in funding entrepreneurial projects. It is still a niche way for funding but growing rapidly. CF is earning its place among traditional funding options and has potential to fund projects which otherwise would struggle to find funding. With CF entrepreneur can tap into geographically diverse audience. It is a powerful validation tool for products and ideas and has the power to bring democratic elements to entrepreneurial funding.

Growth strategies of international companies in the emerging markets of South-East Europe

Työn tarkoituksena oli tutkia niitä tekijöitä jotka ovat vaikuttaneet kansainvälisten yritysten myynnin kasvuun Romaniassa, Bulgariassa, Serbiassa ja Sloveniassa. Tutkimusta varten haastateltiin neljää kansainvälisen yrityksen edustajaa sekä 16 kansainvälisen kaupan ammattilaista. Työn akateemisena viitekehyksenä käytettiin keskeisiä kansainvälisen liiketoiminnan teorioita sekä myynnin strategista viitekehystä. Johtopäätöksenä katsotaan, että menestyvillä yrityksillä on selvä kansainvälistymis-strategia, kansainvälinen organisaatio, konsultoiva myyntityyli ja resursseja investoida koulutukseen. Tarkastelun alla olevista maista etenkin Romaniasta ja Bulgarista löytyy liiketoiminta potentiaalia. Tutkimuksen johtopäätökset perustuvat laadullisiin ja määrällisiin tutkimusmenetelmiin ja ne on tarkoitettu palvemaan Tikkurila Oy:tä. Tutkimustuloksia on myös mahdollista soveltaa laajemmin samanlaisessa tutkimusympäristössä, kunhan tutkittavan liiketoimintaympäristön erityispiirteet ovat otetttu huomioon

Business models enhancing the diffusion of mobile Internet in emerging markets

Tämän tutkimuksen päätavoitteena oli selvittää, millaiset liiketoimintamallit soveltuvat mobiilin internet-liiketoiminnan harjoittamiseen kehittyvillä markkinoilla. Tavoitteena oli myös selvittää tekijöitä, jotka vaikuttavat mobiilin internetin diffuusioon. Tutkimus tehtiin käyttäen sekä kvantitatiivista että kvalitatiivista tutkimusmenetelmää. Klusterianalyysin avulla 40 Euroopan maasta muodostettiin sisäisesti homogeenisiä maaklustereita. Näiden klustereiden avulla oli mahdollista suunnitella erityyppisille markkinoille soveltuvat liiketoimintamallit. Haastatteluissa selvitettiin asiantuntijoiden näkemyksiä tekijöistä, jotka vaikuttavat mobiilin internetin diffuusioon kehittyvillä markkinoilla. Tutkimuksessa saatiin selville, että tärkeimmät liiketoimintamallin elementit kehittyvillä markkinoilla ovat hinnoittelu, arvotarjooma ja arvoverkko. Puutteellisen kiinteän verkon todettiin olevan yksi tärkeimmistä mobiilin internetin diffuusiota edistävistä tekijöistä kehittyvillä markkinoilla.

Time-Varying Benefits of International Diversification for Finnish Investor: Country-Specific Strategy Concentrating on Emerging Markets

The main objective of this study is to investigate whether the Finnish investors’ country-specific strategy concentrating on emerging markets provides diversification benefits. We also analyze whether the benefits of international diversification has been diminished after periods of high volatility caused by different market crisis. The objective is investigated with three methods: Correlation coefficients, rolling correlations added with OLS trend-lines and Box’s M statistic. All the empirical tests are analyzed and calculated with logarithmic returns of weekly time series data from Friday closing values between January 1995 and December 2007. The number of weekly observations is 678. The data type is total return indices of different countries. Data is collected from DataStream and provided by Datastream Financial. Countries investigated are Finland, Argentina, Brazil, Chile, China, India, Mexico, Poland, Russia, South Africa, South Korea, Thailand and Turkey. The current data is quoted both in U.S. Dollars and local currencies. The empirical results of this thesis show that the correlation coefficients are time-varying across Finland and 12 emerging market countries. Although the correlations have risen from 1995 to 2007, there can be found sub-periods where the correlation has declined from earlier period. The results also indicate that a Finnish investor constructing a portfolio of emerging market countries cannot rely on the correlation coefficients estimated from historical data because of the instability of correlation matrices.

On performance persistence in emerging markets: Empirical evidence from Asia-Pacific

The purpose of this study is to investigate the performance persistence of international mutual funds, employing a data sample which includes 2,168 European mutual funds investing in Asia-Pacific region; Japan excluded. Also, a number of performance measures is tested and compared, and especially, this study tries to find out whether iterative Bayesian procedure can be used to provide more accurate predictions on future performance. Finally, this study examines whether the cross-section of mutual fund returns can be explained with simple accounting variables and market risk. To exclude the effect of the Asian currency crisis in 1997, the studied time period includes years from 1999 to 2007. The overall results showed significant performance persistence for repeating winners when performance was tested with contingency tables. Also the annualized alpha spreads between the top and bottom portfolios were more than ten percent at their highest. Nevertheless, the results do not confirm the improved prediction accuracy of the Bayesian alphas.