Essays on the economics of emerging financial markets (Asia)

This thesis explores issues pertaining to the stock market and the banking sector in emerging financial markets. During the last two decades, many emerging markets have embarked on a course of economic reform, including stock market liberalization. The first chapter addresses the question of whether these markets have become more informationally efficient in the years following liberalization. We find that emerging stock markets do indeed become more efficient. Additionally, using a panel data set on sixteen liberalizing countries and various measures of liquidity, we show that liberalization leads to enhanced liquidity, after controlling for size and other relevant factors. Furthermore, we address the question of whether the increase in efficiency could be the result of an increase in liquidity. This chapter concludes that an increase in liquidity leads to a decrease in market inefficiency. This confirms the intuition that stock market liberalizations render emerging equity markets more liquid and efficient.; Chapter 2 (Joint with Adam Honig) examines the existence of moral hazard in the banking sectors of East Asian economies during the years preceding the crisis of 1997. We test for moral hazard by determining whether protected banks received more funds from creditors than otherwise identical banks that did not enjoy such guarantees. Moreover, we test if bank managers of protected banks took on more risk than their counterparts at non-protected banks. Using micro-level data on bank balance sheets and income statements, we find strong evidence of moral hazard among bank managers and some evidence of moral hazard among bank creditors.; Chapter 3 analyzes the pricing and dynamics of American Depositary Receipts (ADR) stocks The American Depository Receipt is a unique security in that it is quoted in US dollars and traded on US exchanges, while deriving its income stream from companies domiciled overseas. Three pricing factors are considered: the return on the local market, the return on the world market and the relevant exchange rate between the US dollar and the home currency. Furthermore this chapter analyses the pricing behavior by studying the dynamics of the transmission and persistence of shocks from one market to the others.