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A Sampling of Recent Researchon Global Capital Markets
G. Andrew KarolyiVisiting Pembroke Fellow in Finance Cambridge University
Dimensional Fund Advisors UK, London, April 17, 2013
Research Themes & Approach
• Research focus: international asset pricing, international capital markets & corporate finance
• Research strategy: empirically-driven, large-scale data exercises, some policy orientation
• A sampling of recent studies:– Asset pricing: “Forecasting liquidity black holes”– Corporate: “Where have all the IPOs gone?”
• New book (2014, Oxford University Press)
Forecasting Liquidity “Black Holes”
• Liquidity “black holes” or “spirals” are episodes in which liquidity dries up across broad cross-section of securities at the same time, as buyers disappear & price declines do not bring them back (LTCM, Asian flu)
• Previous studies of U.S. markets link black hole events to market-wide volatility spikes and funding constraints of financial intermediaries (hedge funds) (a “supply” story)
• We “widen the lens” to identify similar events of heightened “commonality in liquidity” in 40 countries over last 20 years, even more frequent, more intense in emerging markets, and around periods of higher correlated-trading, strong foreign institutional presence, which suggest a “demand” story
Observing liquidity spirals
Where have all the (US) IPOs gone?
• We survey 29,361 IPOs from 89 countries constituting $2.6 trillion of capital raised from 1990 to 2007 and uncover dramatic shifts in IPO activity across countries over this period and try to explain key facts
• US share of worldwide activity by counts and proceeds declined dramatically during 2000s relative to its economic importance– Explained, in part, by growth in IPO activity in other countries– Role of legal and other institutions have changed over time– Theory predicts that the force of financial globalization should
diminish importance and we show that this explains a lot– Non-U.S. markets exploited globalization using “global IPOs”– Unique U.S.-specific factors at work, but not SOX, Reg FD, etc.
The US Left Behind?
“Cracking the Emerging Markets Enigma”
• In February, I signed a contract to write a book for Oxford University Press, targeting 2014, writing away furiously now…
• Based on work I did for a large, global asset management firm to help develop systematic, all-encompassing, & rigorous approach to measure accessibility of EMs
• Builds six categories of market attributes that “constrain” global investors:– Market capacity– Operational efficiency– Openness to foreign investors– Corporate transparency– Investor protections– Political stability
• The “enigma”? EMs are defined by tremendous growth opportunities, a great hunger for external capital to fund growth, but hindered by “fragile” institutions that deter global investors
The Approach
• Each of the six market attributes were comprised of components that arose from the academic research showing the most relevant economic, political, or institutional variables
• The factors were weighted to construct scaled, standardized indexes or “indicators” using principal-components analysis (PCA), a procedure to ensure linear combination that maximizes explanatory power of the data across variables & countries (including 33 emerging plus 22 developed from World Federation of Stock Exchanges, www.world-exchanges.org)
• What are the components of the six attributes?• What are the weights for each component?• What are the indicator scores for different countries?
The Components of the Indicators
• Market Capacity– S&P/IFC classification– Market cap to GDP– Turnover– New issues to GDP– GDP per capita
• Operational Efficiency– Brokerage commissions,
transfer taxes, market impact costs
– Illiquidity proxies– Short-sales constraints– Settlement cycles (T+N),
book-entry, delivery vs. payment (DVP)
• Market Openness– S&P/IFC accessibility– Registration rules,
ownership restrictions, FX convertibility limits
– Withholding taxes, double taxation treaties
• Transparency– Governance rankings– Accounting standards– Earnings management– Blockholder control– Closely-held shares
• Investor Protection– Legal systems (English
common, French civil)– Anti-director rights– Creditor info, registry– Director liability, shareholder
suits– Contract enforcement – Insider trading laws
• Political Stability– Political constraints – Voice & Accountability, Govt.
Effectiveness, Regulatory Burden, Rule of Law, Control of Corruption
– Transparency International’s Corruption Perception Index
– Heritage Foundation’s Freedom Index
Principal Component Scores
Graphically
