Browsing by Author "Thapa, Chandra"
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Item Open Access Country-specific equity market characteristics and foreign equity portfolio allocation(Elsevier Science B.V., Amsterdam., 2012-03-01T00:00:00Z) Thapa, Chandra; Poshakwale, Sunil S.Do country-specific equity market characteristics explain variations in foreign equity portfolio allocation? We study this question using comprehensive foreign equity portfolio holdings data and different measures of country-specific equity market factors for 36 host countries. Employing panel data econometric estimations, our investigation shows that foreign investors prefer to invest more in larger and highly visible developed markets which are more liquid, exhibit a higher degree of market efficiency and have lower trading costs. The findings imply that by improving the preconditions necessary for well- functioning capital markets, policymakers should be able to attract higher levels of foreign equity portfolio investments.Item Open Access Determinants of worldwide foreign equity portfolio holdings and impact of foreign equity porfolio flows on global financial linkages of emerging markets(Cranfield University, 2010-07) Thapa, Chandra; Poshakwale, Sunil S.This thesis comprises of four empirical studies. The first three empirical studies identify and investigate the role of different factors explaining the cross sectional and temporal variation of foreign equity portfolio holdings for thirty-six developed and developing host countries. The fourth empirical study demonstrates the impact of foreign equity flows on global financial linkages of four Asian emerging markets. Our first three empirical studies use foreign equity portfolio holding data on 36 host countries and employ different panel data models. Our survey of the literature shows that only few studies (two to the best of our knowledge) have modelled the bilateral cross-country foreign equity portfolio holdings on a global basis. Further, unlike previous studies, which use cross-section models, we test all our hypotheses using relatively more efficient random effect and more robust fixed effect panel data models. The first empirical study examines three hypotheses demonstrating the association between three different components of transaction costs (commission, fees and market impact) and foreign equity portfolio allocation (FEPA). To the best of our knowledge, we are first to comprehensively test the role of each of the components individually and collectively in modelling FEPA. Addressing several robustness issues, we show significant and robust effect of transaction costs with clear evidence that foreign investors tend to underweight countries with higher transaction costs. In our second empirical study we test five hypotheses investigating the role of country specific equity market characteristics (CSEMC) in explaining FEPA. We use five different variables as proxy of CSEMC, such as stock market development/size, market liquidity, emerging market dummy, equity return volatility and exchange rate volatility. We are first to use the later two volatility measures in modelling FEPA. Consistent with theory, the results show that all the CSEMC factors tend to have strong and statistically significant effect on foreign equity portfolio allocation decisions. Our third empirical study investigates the relationship between investor protection and FEPA. The existing findings on the role of investor protection are highly controversial with divided views and contrasting conclusions. By including three different measures, we demonstrate that investor protection right, particularly the one specific to foreign investments, is also an important feature influencing allocation decisions. Finally, in our fourth empirical study we use daily foreign equity flow data for four Asian emerging markets. Application of co-integration and vector error correction (VEC) models provide strong indication that the increase in foreign equity flows is driving the global financial linkages of the Asian emerging markets. Using different variants of VEC model, our investigation also demonstrates that foreign investors in the selected Asian emerging markets engage in momentum trading strategy and flows have significant effect on the local equity market (price pressure hypothesis). Overall, our study concludes that stock market development features are the most important inputs in the worldwide foreign equity portfolio allocation decision. Furthermore, there is an indication that the growing foreign equity portfolio flows are, in part, responsible for the increasing global financial linkages of the Asian emerging markets.Item Open Access Foreign Investors and Global Integration of Emerging Indian Equity Market(SAGE Publications, 2010-06) Poshakwale, Sunil S.; Thapa, ChandraThis article examines the influence of foreign investors in explaining short-run dynamics and long-run relationship of the emerging Indian equity market with global equity markets. Using daily return series and equity portfolio investments made by foreign institutional investors, we conclude that the rapid growth in the flow of foreign equity portfolio investments is leading to greater integration of the Indian equity market with global markets. With the increased global integration, the Indian market will become more susceptible to global shocks as has been witnessed by significant losses suffered by investors in the Indian market following the sub-prime crisis.Item Open Access The impact of foreign equity investment flows on global linkages of the Asian emerging equity markets(Taylor & Francis, 2009-11) Poshakwale, Sunil S.; Thapa, ChandraEvidence of the impact of foreign equity investment flows on the global linkages of the Asian emerging equity markets is provided. Findings confirm that there is a general trend towards greater integration and this process appears to be influenced by the increasing volumes of foreign equity portfolio investment flows. The results support the widely-held view that foreign investors are return chasers and their trading behaviour is based on information drawn from recent returns available in the emerging markets. The results also confirm the price-pressure hypothesis which suggests that foreign equity investors are mainly responsible for the increases in the stock market valuations in the Asian emerging markets. In view of the findings, the Asian emerging markets may become more vulnerable to the changes in foreign investment flows and turn more volatile in future.Item Open Access The impact of foreign equity investment flows on integration of Asian emerging equity markets(Cranfield University School of Management, 2009-01) Poshakwale, Sunil S.; Thapa, ChandraThe paper investigates the impact of foreign equity investment flows on the integration process of emerging markets with the global markets. Daily net foreign equity investment flow and return data for the four Asian emerging markets of India, Korea, Taiwan, and Thailand for 2001-2007 is used in examining the long and short-run relationship with the global markets. The findings show that despite the instability of the correlation structure, there is a general trend towards greater integration. The cointegration analysis results suggest that the four Asian emerging markets are getting integrated with the global markets and the integration process is driven by the activities of the foreign investors. Findings confirm that the global markets have significant causal impact on returns of all four emerging markets and the foreign equity investment flows play a significant role in correcting the short-term deviations in the convergence process. Whilst the results are consistent with previous research, we find stronger evidence for the positive feedback hypothesis for all four markets. The results support the widely held view that foreign investors are high return chasers and extract information from recent returns. Our results also confirm the price pressure hypothesis which suggests that foreign equity investors are mainly responsible for the increase in the stock market valuations in the four Asian emerging markets. If this were to be true, the emerging markets may become increasingly vulnerable to the shocks in the volume of foreign equity investment flows and turn more volatile in future.Item Open Access Integration of emerging equity markets. A systematic review(Cranfield University, 2007-08) Thapa, Chandra; Poshakwale, Sunil S.Emerging equity markets have attracted foreign investor by their higher returns and prospect of superior risk diversification benefits. In light of increasing flow of equity portfolio investments into these economies and their subsequent integration with equity markets of developed world, studies have not only shown concern over the reduction in the long term risk diversification benefits, but also there may be less of increase in the original price of securities. Local economy initiates formal financial liberalisation measures to integrate with world capital markets. However, removal of regulatory restrictions may not attract foreign investments in the presence of other indirect barriers and emerging markets specific risks. Also, the process of financial liberalisation is time varying and not one off event. This creates difficulty in pin pointing the exact date of liberalisation. These complexities cause difficulties in the development of dynamic models for pricing securities in emerging markets and measuring the impact of integration. However, with the removal of direct and indirect barriers to foreign investments, these markets are showing greater integration with world markets. With increasing integration emerging markets are becoming more susceptible to global risk factors. Higher degree of integration should reduce cost of equity capital (expected return) and increase the correlation of returns with developed markets. However, empirical works report the reduction in cost of capital to be lower than predicted by asset pricing models. It is also challenging to measure the degree of market integration because of the constant structural changes observed in emerging markets. Countries have even been found to exhibit segmentation over time. Hence, in the context of asset pricing models the findings on the degree of integration are inconclusive and conflicting.Item Open Access International equity portfolio allocations and transaction costs(Elsevier Science B.V., Amsterdam., 2010-11-01T00:00:00Z) Thapa, Chandra; Poshakwale, Sunil S.In spite of the critical role of transaction cost, there are not many papers that explicitly examine its influence on international equity portfolio allocation decisions. Using bilateral cross-country equity portfolio investment data and three direct measures of transaction costs for 36 countries, we provide evidence that markets where transaction costs are lower attract greater equity portfolio investments. The results imply that future research on international equity portfolio diversification cannot afford to ignore the role of transaction costs, and policy makers, especially in emerging markets, will have to reduce transaction costs to attract higher levels of foreign equity portfolio investments.