In this paper we analyse aggregate and firm level systemic risk for US and European banks from 2004 to 2012. We observe that common systemic risk indicators are primarily driven by firm size which implies an overriding concern for “too-big-to-fail” institutions. However, smaller banks may still pose considerable systemic threats, as exemplified by the Northern Rock debacle in 2007. By introducing a simple standardisation, we obtain a new risk measure that identifies Northern Rock as a top ranking systemic institution up to 4 quarters before its bailout. The new indicator also appears to have a superior ability to predict which banks would be affected by the most severe stock price contractions during the 2007-2009 sub-prime crisis. In addition we find that a bank’s balance sheet characteristics can help to forecast its systemic importance and, as a result, may be useful early warning indicators. Interestingly, the systemic risk of US and European banks appears to be driven by different factors.
{"title":"Systemic Risk and Bank Size","authors":"Simone Varotto, Lei Zhao","doi":"10.2139/ssrn.2320693","DOIUrl":"https://doi.org/10.2139/ssrn.2320693","url":null,"abstract":"In this paper we analyse aggregate and firm level systemic risk for US and European banks from 2004 to 2012. We observe that common systemic risk indicators are primarily driven by firm size which implies an overriding concern for “too-big-to-fail” institutions. However, smaller banks may still pose considerable systemic threats, as exemplified by the Northern Rock debacle in 2007. By introducing a simple standardisation, we obtain a new risk measure that identifies Northern Rock as a top ranking systemic institution up to 4 quarters before its bailout. The new indicator also appears to have a superior ability to predict which banks would be affected by the most severe stock price contractions during the 2007-2009 sub-prime crisis. In addition we find that a bank’s balance sheet characteristics can help to forecast its systemic importance and, as a result, may be useful early warning indicators. Interestingly, the systemic risk of US and European banks appears to be driven by different factors.","PeriodicalId":381709,"journal":{"name":"ERN: International Finance (Topic)","volume":"110 3-4","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2017-08-18","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"120992110","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This study examines whether Bitcoin, a digital decentralized currency, can become a viable alternative to fiat currencies. Bitcoin currently does not fulfill the criteria of being a currency because it does not function as a medium of exchange, a unit of account, and a store of value. Bitcoin’s biggest obstacle from fulfilling these functions is the price volatility. A GARCH (1,1) model is used to analyze Bitcoin’s volatility in respect to the macroeconomic variables of countries where Bitcoin is being traded the most. Bitcoin already behaves similarly to fiat currencies in China, the U.S. and the European Union but not in Japan. There is also evidence that Bitcoin acts as a safe-haven asset in China. The volatility of Bitcoin has been steadily decreasing throughout its lifetime. If it follows the trend of its six years of existence, it will reach the volatility levels of fiat currencies in 2019-2020 and become a functioning alternative to fiat currencies.
{"title":"Can Bitcoin Become a Viable Alternative to Fiat Currencies? An Empirical Analysis of Bitcoin's Volatility Based on a GARCH Model","authors":"V. Cermak","doi":"10.2139/ssrn.2961405","DOIUrl":"https://doi.org/10.2139/ssrn.2961405","url":null,"abstract":"This study examines whether Bitcoin, a digital decentralized currency, can become a viable alternative to fiat currencies. Bitcoin currently does not fulfill the criteria of being a currency because it does not function as a medium of exchange, a unit of account, and a store of value. Bitcoin’s biggest obstacle from fulfilling these functions is the price volatility. A GARCH (1,1) model is used to analyze Bitcoin’s volatility in respect to the macroeconomic variables of countries where Bitcoin is being traded the most. Bitcoin already behaves similarly to fiat currencies in China, the U.S. and the European Union but not in Japan. There is also evidence that Bitcoin acts as a safe-haven asset in China. The volatility of Bitcoin has been steadily decreasing throughout its lifetime. If it follows the trend of its six years of existence, it will reach the volatility levels of fiat currencies in 2019-2020 and become a functioning alternative to fiat currencies.","PeriodicalId":381709,"journal":{"name":"ERN: International Finance (Topic)","volume":"441 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2017-05-02","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"125180308","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pablo Fernández, V. Pershin, Isabel Fernández Acín
This paper contains the statistics of a survey about the Risk-Free Rate (RF) and the Market Risk Premium (MRP) used in 2017 for 41 countries. We got answers for 68 countries, but we only report the results for 41 countries with more than 25 answers. The average (RF) used in 2017 was smaller than the one used in 2015 in 12 countries (in 5 of them the difference was more than 1%). In 10 countries the average (RF) used in 2017 was more than a 1% higher than the one used in 2015 (see table 6). The change between 2015 and 2017 of the average Market risk premium used was higher than 1% for 11 countries (see table 6). Most of the respondents use for Europe and UK a Risk-Free Rate (RF) higher than the yield of the 10-year Government bonds. Due to Quantitative Easing, the Risk-Free Rate (RF) and the Market Risk Premium (MRP) reported for Euro countries are negatively correlated (Spain -51%; Germany -28%; France -47%; Italy -30%)
{"title":"Discount Rate (Risk-Free Rate and Market Risk Premium) Used for 41 Countries in 2017: A Survey","authors":"Pablo Fernández, V. Pershin, Isabel Fernández Acín","doi":"10.2139/SSRN.2954142","DOIUrl":"https://doi.org/10.2139/SSRN.2954142","url":null,"abstract":"This paper contains the statistics of a survey about the Risk-Free Rate (RF) and the Market Risk Premium (MRP) used in 2017 for 41 countries. We got answers for 68 countries, but we only report the results for 41 countries with more than 25 answers. \u0000The average (RF) used in 2017 was smaller than the one used in 2015 in 12 countries (in 5 of them the difference was more than 1%). In 10 countries the average (RF) used in 2017 was more than a 1% higher than the one used in 2015 (see table 6). The change between 2015 and 2017 of the average Market risk premium used was higher than 1% for 11 countries (see table 6). \u0000Most of the respondents use for Europe and UK a Risk-Free Rate (RF) higher than the yield of the 10-year Government bonds. Due to Quantitative Easing, the Risk-Free Rate (RF) and the Market Risk Premium (MRP) reported for Euro countries are negatively correlated (Spain -51%; Germany -28%; France -47%; Italy -30%)","PeriodicalId":381709,"journal":{"name":"ERN: International Finance (Topic)","volume":"4 6","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2017-04-17","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"120916265","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This study empirically investigates the spillover effect of the US Fed’s monetary policy on the international capital flow in South Korea. Novel high frequency data from the EPFR Global and the event study strategy allow us to identify the Fed’s policy shock with minimal assumptions. In contrast to the conventional wisdom, our identification strategy finds that contemporary cross-border equity flows increase upon a (more-than-expected) contractionary interest rate policy during the event week. This result is robust to exclusion of influential observations, alternative estimation methods as well as inclusion of an additional explanatory variable which explicitly controls for possible endogeneity. When the business cycle asymmetry is taken into account, our simplistic model explains the variation in the active equity flow up to 72%. International bond investors also respond positively to the Fed policy surprise, in one week prior to the policy event. The effect of the US policy shock does not last longer than a week’s time after the initial impact for both equity and bond flows. Finally, we replicate the negative estimators found in the literature using full sample regressions. This result indirectly show that differences in results are potentially attributed to the difference in identification methodologies, not the data. Our findings suggest that the implicit identification assumptions in conventional empirical capital flow literature need further investigations.
{"title":"US Interest Rate Policy Spillover and International Capital Flow: Evidence from Korea","authors":"Jieun Lee, Jung-min Kim, J. Shin","doi":"10.2139/ssrn.2908272","DOIUrl":"https://doi.org/10.2139/ssrn.2908272","url":null,"abstract":"This study empirically investigates the spillover effect of the US Fed’s monetary policy on the international capital flow in South Korea. Novel high frequency data from the EPFR Global and the event study strategy allow us to identify the Fed’s policy shock with minimal assumptions. In contrast to the conventional wisdom, our identification strategy finds that contemporary cross-border equity flows increase upon a (more-than-expected) contractionary interest rate policy during the event week. This result is robust to exclusion of influential observations, alternative estimation methods as well as inclusion of an additional explanatory variable which explicitly controls for possible endogeneity. When the business cycle asymmetry is taken into account, our simplistic model explains the variation in the active equity flow up to 72%. International bond investors also respond positively to the Fed policy surprise, in one week prior to the policy event. The effect of the US policy shock does not last longer than a week’s time after the initial impact for both equity and bond flows. Finally, we replicate the negative estimators found in the literature using full sample regressions. This result indirectly show that differences in results are potentially attributed to the difference in identification methodologies, not the data. Our findings suggest that the implicit identification assumptions in conventional empirical capital flow literature need further investigations.","PeriodicalId":381709,"journal":{"name":"ERN: International Finance (Topic)","volume":"26 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2016-12-30","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"116907049","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This study empirically investigates the effects of monetary policy shocks on the exchange rate in six emerging countries (Korea, Thailand, the Philippines, Mexico, Brazil, and Colombia). VAR models are used, wherein sign restrictions on impulse responses are imposed to identify monetary policy shocks. The empirical model reflects the small open emerging economy features. The estimation period is the recent period in which these countries adopted inflation targeting and more flexible exchange rate regimes based on the experience of advanced countries. The main findings are as follows. First, various puzzles such as the i°exchange rate puzzle,i± i°delayed overshooting puzzle,i± and i°forward discount bias puzzlei± are frequently found in these countries. Second, more severe puzzles are found in these emerging countries than in small open advanced countries.
{"title":"Effects of Monetary Policy Shocks on Exchange Rate in Emerging Countries","authors":"Soyoung Kim, Kuntae Lim","doi":"10.2139/ssrn.2899939","DOIUrl":"https://doi.org/10.2139/ssrn.2899939","url":null,"abstract":"This study empirically investigates the effects of monetary policy shocks on the exchange rate in six emerging countries (Korea, Thailand, the Philippines, Mexico, Brazil, and Colombia). VAR models are used, wherein sign restrictions on impulse responses are imposed to identify monetary policy shocks. The empirical model reflects the small open emerging economy features. The estimation period is the recent period in which these countries adopted inflation targeting and more flexible exchange rate regimes based on the experience of advanced countries. The main findings are as follows. First, various puzzles such as the i°exchange rate puzzle,i± i°delayed overshooting puzzle,i± and i°forward discount bias puzzlei± are frequently found in these countries. Second, more severe puzzles are found in these emerging countries than in small open advanced countries.","PeriodicalId":381709,"journal":{"name":"ERN: International Finance (Topic)","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2016-12-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"129788975","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Existing theories on real exchange rates predict a significant undervaluation of the Korean won (KRW) in the early and mid-1990s. For instance, given the historical importance of exporting sectors in the Korean economy, the optimum currency area (OCA) literature would postulate that massive current account deficits in the mid-1990s should have led to drastic weakening of KRW. The paper demonstrates why this expectation did not materialize and instead an unprecedentedly large degree of overvaluation occurred. It first shows that the KRW overvaluation during the 1990s was indeed unique in a quantitative, cross-national passion. Second, focusing on three variables, namely, financial repression, devaluation pass-through, and policy exhibitionism, the paper examines how the unraveling of the developmental state eventually gave rise to the 1990s’ overvaluation. It argues that the policy exhibitionism of the new civilian government amplified the influence of Chaebols on monetary policies, which in turn created a strong appreciative force to KRW. It also contends that the increasing pass-through cost of devaluation explains why Chaebol did not want to tame the excessive appreciative trend despite its detrimental effect on their exports.
{"title":"The Mysterious Overvaluation of KRW in the 1990s","authors":"Byunghwan Son","doi":"10.2139/ssrn.2864107","DOIUrl":"https://doi.org/10.2139/ssrn.2864107","url":null,"abstract":"Existing theories on real exchange rates predict a significant undervaluation of the Korean won (KRW) in the early and mid-1990s. For instance, given the historical importance of exporting sectors in the Korean economy, the optimum currency area (OCA) literature would postulate that massive current account deficits in the mid-1990s should have led to drastic weakening of KRW. The paper demonstrates why this expectation did not materialize and instead an unprecedentedly large degree of overvaluation occurred. It first shows that the KRW overvaluation during the 1990s was indeed unique in a quantitative, cross-national passion. Second, focusing on three variables, namely, financial repression, devaluation pass-through, and policy exhibitionism, the paper examines how the unraveling of the developmental state eventually gave rise to the 1990s’ overvaluation. It argues that the policy exhibitionism of the new civilian government amplified the influence of Chaebols on monetary policies, which in turn created a strong appreciative force to KRW. It also contends that the increasing pass-through cost of devaluation explains why Chaebol did not want to tame the excessive appreciative trend despite its detrimental effect on their exports.","PeriodicalId":381709,"journal":{"name":"ERN: International Finance (Topic)","volume":"11 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2016-11-03","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"133354868","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We analyze the quantitative impact of the non-tradable sector and structural change on international capital flows. We argue that the allocation puzzle (Gourinchas and Jeanne (2013)) reflects the difference in the magnitudes rather than the direction of net capital flows predicted by the one sector model and those observed in the data. We show that the introduction of a non-tradable sector can reconcile much of the differences between the predictions of the model and the empirical observations, and account for as much as 54% of the allocation puzzle. Complementarity in consumption between tradable and non-tradable goods, as well as structural change, as measured by the movement of labor from agriculture and manufactures (tradable) to services (non-tradable), play a central role in accounting for the relatively low magnitudes of capital flows observed in the data.
{"title":"Non-Traded Goods, Structural Change, and Capital Flows to Developing Countries","authors":"J. Rothert, Jacob Short","doi":"10.2139/ssrn.2746671","DOIUrl":"https://doi.org/10.2139/ssrn.2746671","url":null,"abstract":"We analyze the quantitative impact of the non-tradable sector and structural change on international capital flows. We argue that the allocation puzzle (Gourinchas and Jeanne (2013)) reflects the difference in the magnitudes rather than the direction of net capital flows predicted by the one sector model and those observed in the data. We show that the introduction of a non-tradable sector can reconcile much of the differences between the predictions of the model and the empirical observations, and account for as much as 54% of the allocation puzzle. Complementarity in consumption between tradable and non-tradable goods, as well as structural change, as measured by the movement of labor from agriculture and manufactures (tradable) to services (non-tradable), play a central role in accounting for the relatively low magnitudes of capital flows observed in the data.","PeriodicalId":381709,"journal":{"name":"ERN: International Finance (Topic)","volume":"51 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2016-09-29","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"115998630","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper examines the relationship between capital flows, exchange rate, and growth for the Nigerian economy for the periods 1986-2014. Employing the vector autoregressive (VAR) approach, empirical findings from the impulse response reveals that capital inflows respond negatively to changes in exchange rate. Also, the results show that capital inflows react positively to growth suggesting that the higher the economic growth the more the capital inflows. The study also shows that exchange rate response positively to shock in capital inflows suggesting that the more the capital inflows the more the Nigeria currency appreciates. Furthermore, it was found that growth responds positively to shock in capital inflows indicating that the higher the capital inflows the higher the rate of economic growth. The variance decomposition of capital inflows shows that variation in capital inflows is greatly influenced by growth. Also, the variance decomposition of exchange rate suggests that capital inflow plays a significant role in the variation of the exchange rate. Furthermore, the outcome of the study also shows that both the capital inflows and exchange rate produce almost the same influence on economic growth. Finally, employing the Granger causality in determining the causal relationship between the variables, it was found that there is a unidirectional causal relationship between growth and capital inflows in Nigeria. The implication of this study is that government should design and implement policies towards enhancing economic growth to stimulate capital inflow.
{"title":"Dynamic Interaction between Capital Flows, Exchange Rates and Growth: Evidence From Nigeria","authors":"C. Ogbechie, F. Anetor","doi":"10.2139/ssrn.2838452","DOIUrl":"https://doi.org/10.2139/ssrn.2838452","url":null,"abstract":"This paper examines the relationship between capital flows, exchange rate, and growth for the Nigerian economy for the periods 1986-2014. Employing the vector autoregressive (VAR) approach, empirical findings from the impulse response reveals that capital inflows respond negatively to changes in exchange rate. Also, the results show that capital inflows react positively to growth suggesting that the higher the economic growth the more the capital inflows. The study also shows that exchange rate response positively to shock in capital inflows suggesting that the more the capital inflows the more the Nigeria currency appreciates. Furthermore, it was found that growth responds positively to shock in capital inflows indicating that the higher the capital inflows the higher the rate of economic growth. The variance decomposition of capital inflows shows that variation in capital inflows is greatly influenced by growth. Also, the variance decomposition of exchange rate suggests that capital inflow plays a significant role in the variation of the exchange rate. Furthermore, the outcome of the study also shows that both the capital inflows and exchange rate produce almost the same influence on economic growth. Finally, employing the Granger causality in determining the causal relationship between the variables, it was found that there is a unidirectional causal relationship between growth and capital inflows in Nigeria. The implication of this study is that government should design and implement policies towards enhancing economic growth to stimulate capital inflow.","PeriodicalId":381709,"journal":{"name":"ERN: International Finance (Topic)","volume":"126 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2016-08-13","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"128084034","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2016-07-09DOI: 10.1017/cbo9781316181553.010
Shen Wei
Internationalization of Renminbi is a clear policy and an irreversible direction of the Chinese government. The use of Renminbi as a global payment currency is growing rapidly. Meanwhile, financial centers are spotting the potential offered by Renminbi to improve their competitive positions in the post financial crisis era. Major financial centers are making aggressive moves to gain market share in lucrative Renminbi trading. This chapter is an attempt to understand how Renminbi, as a non-freely-convertible currency, is being internationalized and how major financial centers are competing for Renminbi-related businesses. In addition, the chapter tries to comprehend the difficulty in internationalizing Renminbi.
{"title":"Competing for Renminbi: Financial Centers in the Context of Renminbi Globalisation","authors":"Shen Wei","doi":"10.1017/cbo9781316181553.010","DOIUrl":"https://doi.org/10.1017/cbo9781316181553.010","url":null,"abstract":"Internationalization of Renminbi is a clear policy and an irreversible direction of the Chinese government. The use of Renminbi as a global payment currency is growing rapidly. Meanwhile, financial centers are spotting the potential offered by Renminbi to improve their competitive positions in the post financial crisis era. Major financial centers are making aggressive moves to gain market share in lucrative Renminbi trading. This chapter is an attempt to understand how Renminbi, as a non-freely-convertible currency, is being internationalized and how major financial centers are competing for Renminbi-related businesses. In addition, the chapter tries to comprehend the difficulty in internationalizing Renminbi.","PeriodicalId":381709,"journal":{"name":"ERN: International Finance (Topic)","volume":"3 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2016-07-09","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"124371068","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2016-07-05DOI: 10.1142/S0219091516500077
O. Kim
This study examines the Russian stock market efficiency from two perspectives. First, we document that for the sample of Russian firms cross-listed on the Main Market of the London Stock Exchange (LSE) as Global Depositary Receipts (GDRs), the return series obtained from both the local market and the LSE are time-invariant and hence, predictable. This suggests that the market is inefficient with respect to pricing Russian GDRs and that investors are likely to make systematic nonzero profits. Second, we document profitable arbitrage opportunity surrounding the announcement to adopt IFRS, which is an additional evidence of market inefficiency. The significant pricing spread observed on this key date was due to the differential market reaction to IFRS adoption — neutral on the local MICEX exchange dominated by individual traders and significantly negative on the LSE dominated by institutional investors. This finding can be explained by (i) informational advantages of the local investors due to geographic proximity, (ii) differential expectations with respect to governance norms and listing requirements, and (iii) difference in portfolio composition of the two investor groups.
{"title":"Market Efficiency and Arbitrage Opportunities for Russian Depositary Receipts Cross- Listed on the London Stock Exchange","authors":"O. Kim","doi":"10.1142/S0219091516500077","DOIUrl":"https://doi.org/10.1142/S0219091516500077","url":null,"abstract":"This study examines the Russian stock market efficiency from two perspectives. First, we document that for the sample of Russian firms cross-listed on the Main Market of the London Stock Exchange (LSE) as Global Depositary Receipts (GDRs), the return series obtained from both the local market and the LSE are time-invariant and hence, predictable. This suggests that the market is inefficient with respect to pricing Russian GDRs and that investors are likely to make systematic nonzero profits. Second, we document profitable arbitrage opportunity surrounding the announcement to adopt IFRS, which is an additional evidence of market inefficiency. The significant pricing spread observed on this key date was due to the differential market reaction to IFRS adoption — neutral on the local MICEX exchange dominated by individual traders and significantly negative on the LSE dominated by institutional investors. This finding can be explained by (i) informational advantages of the local investors due to geographic proximity, (ii) differential expectations with respect to governance norms and listing requirements, and (iii) difference in portfolio composition of the two investor groups.","PeriodicalId":381709,"journal":{"name":"ERN: International Finance (Topic)","volume":"45 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2016-07-05","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"125166802","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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