The Spanish equity market (2000-2014): stylized facts

Introduction. This thesis is framed in the last 15 years of history of the Spanish equity market (years 2000 to 2014). In this sense and, as an introduction of this work, in the first chapter the main features of the background of the electronic market for shares and the implications that the migration from out-c1y circles to this automatic system is explained. The main changes of this electronic system (Spanish stock exchange interconnection system) are detailed in this part. Also in this first chapter is explained the important European meeting, in December 1999, of eight stock exchanges which foresee, in a first step, to design a single market model for, lately, try to merge, final step that did not take place. After this initial moment in December 1999, in this work the main features of the market model of the main European markets (London, Paris, Germany and Italy) are generally described, given that it is important to consider the European context of the Spanish equity market, specially during these last fifteen years. Along chapter two, the thesis is supported with the theoretic frame explaining here the nature of markets and their important role in the economy, detailing afte1wards the Spanish case from the point of view of its institutional structure and legal framework. Besides, in this chapter, a deep review of initial public offerings (main concepts and calendar steps) is done as well as take-over bids (typology and key-concepts)...

Pairs trading in the UK equity market: risk and return

In this paper, we provide the first comprehensive UK evidence on the profitability of the pairs trading strategy. Evidence suggests that the strategy performs well in crisis periods, so we control for both risk and liquidity to assess performance. To evaluate the effect of market frictions on the strategy, we use several estimates of transaction costs. We also present evidence on the performance of the strategy in different economic and market states. Our results show that pairs trading portfolios typically have little exposure to known equity risk factors such as market, size, value, momentum and reversal. However, a model controlling for risk and liquidity explains a far larger proportion of returns. Incorporating different assumptions about bid-ask spreads leads to reductions in performance estimates. When we allow for time-varying risk exposures, conditioned on the contemporaneous equity market return, risk-adjusted returns are generally not significantly different from zero.

Financial Markets and Real Ecinomy: Four Essays in International Trade

Financial markets play an important role in an economy performing various functions like mobilizing and pooling savings, producing information about investment opportunities, screening and monitoring investments, implementation of corporate governance, diversification and management of risk. These functions influence saving rates, investment decisions, technological innovation and, therefore, have important implications for welfare. In my PhD dissertation I examine the interplay of financial and product markets by looking at different channels through which financial markets may influence an economy.My dissertation consists of four chapters. The first chapter is a co-authored work with Martin Strieborny, a PhD student from the University of Lausanne. The second chapter is a co-authored work with Melise Jaud, a PhD student from the Paris School of Economics. The third chapter is co-authored with both Melise Jaud and Martin Strieborny. The last chapter of my PhD dissertation is a single author paper.Chapter 1 of my PhD thesis analyzes the effect of financial development on growth of contract intensive industries. These industries intensively use intermediate inputs that neither can be sold on organized exchange, nor are reference-priced (Levchenko, 2007; Nunn, 2007). A typical example of a contract intensive industry would be an industry where an upstream supplier has to make investments in order to customize a product for needs of a downstream buyer. After the investment is made and the product is adjusted, the buyer may refuse to meet a commitment and trigger ex post renegotiation. Since the product is customized to the buyer's needs, the supplier cannot sell the product to a different buyer at the original price. This is referred in the literature as the holdup problem. As a consequence, the individually rational suppliers will underinvest into relationship-specific assets, hurting the downstream firms with negative consequences for aggregate growth. The standard way to mitigate the hold up problem is to write a binding contract and to rely on the legal enforcement by the state. However, even the most effective contract enforcement might fail to protect the supplier in tough times when the buyer lacks a reliable source of external financing. This suggests the potential role of financial intermediaries, banks in particular, in mitigating the incomplete contract problem. First, financial products like letters of credit and letters of guarantee can substantially decrease a risk and transaction costs of parties. Second, a bank loan can serve as a signal about a buyer's true financial situation, an upstream firm will be more willing undertake relationship-specific investment knowing that the business partner is creditworthy and will abstain from myopic behavior (Fama, 1985; von Thadden, 1995). Therefore, a well-developed financial (especially banking) system should disproportionately benefit contract intensive industries.The empirical test confirms this hypothesis. Indeed, contract intensive industries seem to grow faster in countries with a well developed financial system. Furthermore, this effect comes from a more developed banking sector rather than from a deeper stock market. These results are reaffirmed examining the effect of US bank deregulation on the growth of contract intensive industries in different states. Beyond an overall pro-growth effect, the bank deregulation seems to disproportionately benefit the industries requiring relationship-specific investments from their suppliers.Chapter 2 of my PhD focuses on the role of the financial sector in promoting exports of developing countries. In particular, it investigates how credit constraints affect the ability of firms operating in agri-food sectors of developing countries to keep exporting to foreign markets.Trade in high-value agri-food products from developing countries has expanded enormously over the last two decades offering opportunities for development. However, trade in agri-food is governed by a growing array of standards. Sanitary and Phytosanitary standards (SPS) and technical regulations impose additional sunk, fixed and operating costs along the firms' export life. Such costs may be detrimental to firms' survival, "pricing out" producers that cannot comply. The existence of these costs suggests a potential role of credit constraints in shaping the duration of trade relationships on foreign markets. A well-developed financial system provides the funds to exporters necessary to adjust production processes in order to meet quality and quantity requirements in foreign markets and to maintain long-standing trade relationships. The products with higher needs for financing should benefit the most from a well functioning financial system. This differential effect calls for a difference-in-difference approach initially proposed by Rajan and Zingales (1998). As a proxy for demand for financing of agri-food products, the sanitary risk index developed by Jaud et al. (2009) is used. The empirical literature on standards and norms show high costs of compliance, both variable and fixed, for high-value food products (Garcia-Martinez and Poole, 2004; Maskus et al., 2005). The sanitary risk index reflects the propensity of products to fail health and safety controls on the European Union (EU) market. Given the high costs of compliance, the sanitary risk index captures the demand for external financing to comply with such regulations.The prediction is empirically tested examining the export survival of different agri-food products from firms operating in Ghana, Mali, Malawi, Senegal and Tanzania. The results suggest that agri-food products that require more financing to keep up with food safety regulation of the destination market, indeed sustain longer in foreign market, when they are exported from countries with better developed financial markets.Chapter 3 analyzes the link between financial markets and efficiency of resource allocation in an economy. Producing and exporting products inconsistent with a country's factor endowments constitutes a serious misallocation of funds, which undermines competitiveness of the economy and inhibits its long term growth. In this chapter, inefficient exporting patterns are analyzed through the lens of the agency theories from the corporate finance literature. Managers may pursue projects with negative net present values because their perquisites or even their job might depend on them. Exporting activities are particularly prone to this problem. Business related to foreign markets involves both high levels of additional spending and strong incentives for managers to overinvest. Rational managers might have incentives to push for exports that use country's scarce factors which is suboptimal from a social point of view. Export subsidies might further skew the incentives towards inefficient exporting. Management can divert the export subsidies into investments promoting inefficient exporting.Corporate finance literature stresses the disciplining role of outside debt in counteracting the internal pressures to divert such "free cash flow" into unprofitable investments. Managers can lose both their reputation and the control of "their" firm if the unpaid external debt triggers a bankruptcy procedure. The threat of possible failure to satisfy debt service payments pushes the managers toward an efficient use of available resources (Jensen, 1986; Stulz, 1990; Hart and Moore, 1995). The main sources of debt financing in the most countries are banks. The disciplining role of banks might be especially important in the countries suffering from insufficient judicial quality. Banks, in pursuing their rights, rely on comparatively simple legal interventions that can be implemented even by mediocre courts. In addition to their disciplining role, banks can promote efficient exporting patterns in a more direct way by relaxing credit constraints of producers, through screening, identifying and investing in the most profitable investment projects. Therefore, a well-developed domestic financial system, and particular banking system, would help to push a country's exports towards products congruent with its comparative advantage.This prediction is tested looking at the survival of different product categories exported to US market. Products are identified according to the Euclidian distance between their revealed factor intensity and the country's factor endowments. The results suggest that products suffering from a comparative disadvantage (labour-intensive products from capital-abundant countries) survive less on the competitive US market. This pattern is stronger if the exporting country has a well-developed banking system. Thus, a strong banking sector promotes exports consistent with a country comparative advantage.Chapter 4 of my PhD thesis further examines the role of financial markets in fostering efficient resource allocation in an economy. In particular, the allocative efficiency hypothesis is investigated in the context of equity market liberalization.Many empirical studies document a positive and significant effect of financial liberalization on growth (Levchenko et al. 2009; Quinn and Toyoda 2009; Bekaert et al., 2005). However, the decrease in the cost of capital and the associated growth in investment appears rather modest in comparison to the large GDP growth effect (Bekaert and Harvey, 2005; Henry, 2000, 2003). Therefore, financial liberalization may have a positive impact on growth through its effect on the allocation of funds across firms and sectors.Free access to international capital markets allows the largest and most profitable domestic firms to borrow funds in foreign markets (Rajan and Zingales, 2003). As domestic banks loose some of their best clients, they reoptimize their lending practices seeking new clients among small and younger industrial firms. These firms are likely to be more risky than large and established companies. Screening of customers becomes prevalent as the return to screening rises. Banks, ceteris paribus, tend to focus on firms operating in comparative-advantage sectors because they are better risks. Firms in comparative-disadvantage sectors finding it harder to finance their entry into or survival in export markets either exit or refrain from entering export markets. On aggregate, one should therefore expect to see less entry, more exit, and shorter survival on export markets in those sectors after financial liberalization.The paper investigates the effect of financial liberalization on a country's export pattern by comparing the dynamics of entry and exit of different products in a country export portfolio before and after financial liberalization.The results suggest that products that lie far from the country's comparative advantage set tend to disappear relatively faster from the country's export portfolio following the liberalization of financial markets. In other words, financial liberalization tends to rebalance the composition of a country's export portfolio towards the products that intensively use the economy's abundant factors.

Essays on pricing of risk and international linkage of Russian stock market

Last two decades have seen a rapid change in the global economic and financial situation; the economic conditions in many small and large underdeveloped countries started to improve and they became recognized as emerging markets. This led to growth in the amounts of global investments in these countries, partly spurred by expectations of higher returns, favorable risk-return opportunities, and better diversification alternatives to global investors. This process, however, has not been without problems and it has emphasized the need for more information on these markets. In particular, the liberalization of financial markets around the world, globalization of trade and companies, recent formation of economic and regional blocks, and the rapid development of underdeveloped countries during the last two decades have brought a major challenge to the financial world and researchers alike. This doctoral dissertation studies one of the largest emerging markets, namely Russia. The motivation why the Russian equity market is worth investigating includes, among other factors, its sheer size, rapid and robust economic growth since the turn of the millennium, future prospect for international investors, and a number of important major financial reforms implemented since the early 1990s. Another interesting feature of the Russian economy, which gives motivation to study Russian market, is Russia’s 1998 financial crisis, considered as one of the worst crisis in recent times, affecting both developed and developing economies. Therefore, special attention has been paid to Russia’s 1998 financial crisis throughout this dissertation. This thesis covers the period from the birth of the modern Russian financial markets to the present day, Special attention is given to the international linkage and the 1998 financial crisis. This study first identifies the risks associated with Russian market and then deals with their pricing issues. Finally some insights about portfolio construction within Russian market are presented. The first research paper of this dissertation considers the linkage of the Russian equity market to the world equity market by examining the international transmission of the Russia’s 1998 financial crisis utilizing the GARCH-BEKK model proposed by Engle and Kroner. Empirical results shows evidence of direct linkage between the Russian equity market and the world market both in regards of returns and volatility. However, the weakness of the linkage suggests that the Russian equity market was only partially integrated into the world market, even though the contagion can be clearly seen during the time of the crisis period. The second and the third paper, co-authored with Mika Vaihekoski, investigate whether global, local and currency risks are priced in the Russian stock market from a US investors’ point of view. Furthermore, the dynamics of these sources of risk are studied, i.e., whether the prices of the global and local risk factors are constant or time-varying over time. We utilize the multivariate GARCH-M framework of De Santis and Gérard (1998). Similar to them we find price of global market risk to be time-varying. Currency risk also found to be priced and highly time varying in the Russian market. Moreover, our results suggest that the Russian market is partially segmented and local risk is also priced in the market. The model also implies that the biggest impact on the US market risk premium is coming from the world risk component whereas the Russian risk premium is on average caused mostly by the local and currency components. The purpose of the fourth paper is to look at the relationship between the stock and the bond market of Russia. The objective is to examine whether the correlations between two classes of assets are time varying by using multivariate conditional volatility models. The Constant Conditional Correlation model by Bollerslev (1990), the Dynamic Conditional Correlation model by Engle (2002), and an asymmetric version of the Dynamic Conditional Correlation model by Cappiello et al. (2006) are used in the analysis. The empirical results do not support the assumption of constant conditional correlation and there was clear evidence of time varying correlations between the Russian stocks and bond market and both asset markets exhibit positive asymmetries. The implications of the results in this dissertation are useful for both companies and international investors who are interested in investing in Russia. Our results give useful insights to those involved in minimising or managing financial risk exposures, such as, portfolio managers, international investors, risk analysts and financial researchers. When portfolio managers aim to optimize the risk-return relationship, the results indicate that at least in the case of Russia, one should account for the local market as well as currency risk when calculating the key inputs for the optimization. In addition, the pricing of exchange rate risk implies that exchange rate exposure is partly non-diversifiable and investors are compensated for bearing the risk. Likewise, international transmission of stock market volatility can profoundly influence corporate capital budgeting decisions, investors’ investment decisions, and other business cycle variables. Finally, the weak integration of the Russian market and low correlations between Russian stock and bond market offers good opportunities to the international investors to diversify their portfolios.

International private equity funds strategies in the Brazilian market

The Private Equity Market in Brazil has flourished in the last two decades, and international Funds have been entering the market since then. The activity of these enterprises and how they deal with institutional voids that are present in the brazilian market and the all spheres of distances they have with Brazil are investigated in this research. What are the main challenges for those players in the local market and how private equity functions in Brazil? The first chapter reviews all the literature that concerns private equity in their home countries, such as the United States and Spain (Europe) and Brazil. It also discourses about the concept of private equity in all its different senses, the routine of investees and how is the relationship between Private Equity Fund and Investee. In addition to that, the due diligence process is also explained as well as the private equity sector in Brazil and its regulation. Moreover, the distance between countries and how it affects business is presented followed by the concepts of institutional voids. For the inquiry proposed interviews were conducted in order to capture the perspective of International Private Equity Funds on the Brazilian market. Advent International, The Carlyle Group and Mercapital replied to the inquiries and provided the tools so a picture of the sector was developed. This sector has a range of challenges and opportunities and requires the International Fund to establish a local branch in order to really succeed in the market. The results of this project pointed out to the challenges the market presents and how International Private Funds are coming about it. There are definitely gaps that need to be fulfilled however the industry is going in the right direction. Revenues may change its nature in the next couple of years, however from the Private Equity Fund perspective Brazil has been a worthwhile investment. Nonetheless, it is important to question the vision also of the investee and institutional investor so one can have the entire picture of the sector.

Financial liberalization and dynamics of firm-level financing and investment decisions in the Southeast Asian countries

This thesis examines the dynamics of firm-level financing and investment decisions for six Southeast Asian countries. The study provides empirical evidence on the impacts of changes in the firm-level financing decisions during the period of financial liberalization by considering the debt and equity financing decisions of a set of non-financial firms. The empirical results show that firms in Indonesia, Pakistan, and South Korea have relatively faster speed of adjustment than other Southeast Asian countries to attain optimal debt and equity ratios in response to banking sector and stock market liberalization. In addition, contrary to widely held belief that firms adjust their financial ratios to industry levels, the results indicate that industry factors do not significantly impact on the speed of capital structure adjustments. This study also shows that non-linear estimation methods are more appropriate than linear estimation methods for capturing changes in capital structure. The empirical results also show that international stock market integration of these countries has significantly reduced the equity risk premium as well as the firm-level cost of equity capital. Thus stock market liberalization is associated with a decrease in the cost of equity capital of the firms. Developments in the securities markets infrastructure have also reduced the cost of equity capital. However, with increased integration there is the possibility of capital outflows from the emerging markets, which might reverse the pattern of decrease in cost of capital in these markets.

The debate on health in Portugal: governance of health care and the welfare modernization agenda

Comunicação apresentada na "Second Biennial Conference of the Standing Group on Regulation and Governance do ECPR Regulation & Governance, com o tema: (Re)Regulation in the Wake of Neoliberalism’ Consequences of Three Decades of Privatization and Market Liberalization, realizada na Universidade de Utrecht, the Netherlands, de 5 a 7 de Junho de 2008.

Measuring spillover effects in Euro Area equity and bond markets

Since its inception, the Eurozone has experienced significant financial integration. However, with the recent turbulent period, the dynamics of this integration may have changed. This study analyses the volatility spillovers from the US and aggregate Eurozone markets into ten Euro Area national equity and bond markets, using a regime-switching model with shifting shock sensitivities. The evidence confirms an increased impact of shock spillover intensity after the 2008 crisis in the equity market and a decrease of the same parameters for the bond market. In both markets, the overall impact of the Eurozone is greater when compared to the U.S.

The changing relationship between commodity prices and equity prices in commodity exporting

We explore the linkage between equity and commodity markets, focusing in particular on its evolution over time. We document that a country's equity market valuehas significant out-of-sample predictive ability for the future global commodity priceindex for several primary commodity-exporting countries. The out-of-sample predictive ability of the equity market appears around 2000s. The results are robust to usingseveral control variables as well as firm-level equity data. Finally, our results indicatethat exchange rates are a better predictor of commodity prices than equity markets,especially at very short horizons.

Added Value of Combining Value and Momentum Indicators in the Swiss Stock Market

The purpose of the thesis is to examine the added value of combining value and momentum indicators in the Swiss stock exchange. Value indicators employed are P/E, EV/EBITDA, P/CF, P/B ja P/S. Momentum indicators examined are 52-week high, acceleration rate, 12-month past return and 6-month past return. The thesis examines whether the composite value measures based on the above mentioned ratios can add value and whether the inclusion of momentum can further improve the risk return profile of the value portfolios. The data is gathered from the Swiss equity market during the sample period from May 2001 to May 2011. Previous studies have shown that composite value measures can somewhat add value to the value portfolio strategy. Similarly, recent academic literature have found evidence that momentum works well as a timing indicator for time to entry to value stocks. This study indicates that the added value of composite value measures exists. It also shows that momentum combined to acceleration rate can significantly improve the risk adjusted performance of value-only portfolios.

The carbon disclosure project, an evolution in international environmental corporate governance : motivations and determinants of market response to voluntary disclosures

This paper examines the factors associated with Canadian firms voluntarily disclosing climate change information through the Carbon Disclosure Project. Five hypotheses are presented to explain the factors influencing management's decision to disclose this information. These hypotheses include a response to shareholder activism, domestic institutional investor shareholder activism, signalling, litigation risk, and low cost publicity. Both binary logistic regressions as well as a cross-sectional analysis of the equity market's response to the environmental disclosures being made were used to test these hypotheses. Support was found for shareholder activism, low cost publicity, and litigation risk. However, the equity market's response was not found to be statistically significant.

Stock return comovements and integration within the Latin American integrated market

Financial integration has been pursued aggressively across the globe in the last fifty years; however, there is no conclusive evidence on the diversification gains (or losses) of such efforts. These gains (or losses) are related to the degree of comovements and synchronization among increasingly integrated global markets. We quantify the degree of comovements within the integrated Latin American market (MILA). We use dynamic correlation models to quantify comovements across securities as well as a direct integration measure. Our results show an increase in comovements when we look at the country indexes, however, the increase in the trend of correlation is previous to the institutional efforts to establish an integrated market in the region. On the other hand, when we look at sector indexes and an integration measure, we find a decreased in comovements among a representative sample of securities form the integrated market.

Predictability of equity models

In this study, we verify the existence of predictability in the Brazilian equity market. Unlike other studies in the same sense, which evaluate original series for each stock, we evaluate synthetic series created on the basis of linear models of stocks. Following Burgess (1999), we use the “stepwise regression” model for the formation of models of each stock. We then use the variance ratio profile together with a Monte Carlo simulation for the selection of models with potential predictability. Unlike Burgess (1999), we carry out White’s Reality Check (2000) in order to verify the existence of positive returns for the period outside the sample. We use the strategies proposed by Sullivan, Timmermann & White (1999) and Hsu & Kuan (2005) amounting to 26,410 simulated strategies. Finally, using the bootstrap methodology, with 1,000 simulations, we find strong evidence of predictability in the models, including transaction costs.

The influence of macroeconomic factors on primary issues in the Brazilian market

This research analyses the influence of the macroeconomic factors on the primary issue of stocks and debentures in the Brazilian market. Previous studies have agreed on the importance of aspects of the economic situation on a company’s capital structure, but have not established a relationship between the macroeconomic variables and the level of aggregate debt; we can mention Procianoy and Caselani (1997) and Terra (2003) as examples of this. According to Leal (2000), the limitations of the Brazilian capital market suggest that management takes advantage of moments of euphoria in the market - whether caused by a reduction in the rate of interest or by the return being offered by the equity market - to raise funds at rates that are more advantageous to the company. This characterizes the first evidence we have of opportunistic behavior influencing a company’s financing decisions. Eid Jr. (1996) provides us with the first evidence of this opportunistic behavior in his research in which 47% of those interviewed said that they chose fund sources that are economically more advantageous.

The impact of financial development and market conditions on investment-cash flow sensitivity: global evidence

In this study, we analyze the impact of financial development and market conditions on investment-cash flow sensitivity during the 2006-2014 for 76 countries. First, the results show a relationship between investment-cash flow sensitivity and an index of financial development and its components. Second, 68 countries are affected by the 2008-2009 financial crisis, but only 16 countries exhibit a higher investment-cash flow sensitivity during the crisis. Third, investment-cash flow sensitivity is lower in countries with a larger primary debt market, while the size of the primary equity market has no impact. Finally, analyzing investment-cash flow sensitivity over time, we find lower sensitivity during years associated with higher primary debt market activity.