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This chapter aims to determine whether diversification benefits accrue from adding emerging market hedge funds (EMHFs) to an emerging market bond/equity portfolio, and subsequently whether the type of exposure hedge funds provide is justified by their fees. We use multivariate cointegration analysis to show that the advantages of adding hedge funds to balanced portfolios are limited for the three regions of Asia, Eastern Europe, and Latin America, as well as for the entire global emerging market universe. In summary, we find that emerging market hedge funds are generally redundant for diversifying long-only emerging market investment portfolios with long-term investment horizons. This result also holds when we extend our sample by the global financial crisis in 2008 and 2009 and allow for structural breaks according to the Gregory-Hansen (1996) test. Hence, even during the global financial crisis in 2008 and 2009, when risk diversification was most needed, long-term comovements between hedge funds and traditional assets is, with the exception of the Eastern European region, not disrupted. Because EMHF returns are heavily influenced by the emerging market equity and bond markets, we conclude that the “alpha fees” charged by EMHFs may not always be appropriate for the three main regions under consideration. This also holds, however, to a lesser extent, for a global diversification among hedge funds and traditional assets in emerging markets.

This chapter examines dynamic connectedness among emerging Asian equity markets as well as explores their linkages vis-à-vis other major global markets. We find that international equity markets are tightly integrated. Measuring connectedness based on a generalized Vector Autoregressive (VAR) model, more than half of all total forecast error variance in equity return and volatility shocks come from other markets as opposed to country own shocks. When examining the degree of connectedness over time, we find that international stock markets have become increasingly connected, with a gentle upward trend since the Asian financial crisis (AFC) but with a rapid burst during the global financial crisis (GFC). Despite the growing importance of Asian emerging markets in the world economy, we find that their influence on advanced economies are still relatively small, with no significant increase over time. During the past decade, advanced markets have been consistently net transmitters of shocks while emerging Asian markets act as net receivers. Based on the nature of equity shock spillovers, we also find that advanced countries are still tightly connected among themselves while intraregional connectedness within Asia remains strong. By investigating whether uncertainty plays an important role in explaining the degree of stock market connectedness, we find that economic policy uncertainty (EPU) from the US is an important source of financial shock spillover for the majority of international equity markets. In contrast, US financial market uncertainty as proxied by the VIX index drives equity market spillovers only among advanced economies.

The uncertainty as to whether investments in riskier and less efficient markets allow managers to ‘beat the market’ remains a question to which answers are required. Accordingly, the purpose of this chapter is to offer new insights on portfolios of the US, European and Emerging Market (‘EM’) domiciled equity mutual funds whose objectives are the investment in emerging economies, and specifically analyses two main issues: alpha generation and the influence of the funds’ characteristics on their risk-adjusted performance.

The dataset is made up a survivorship-bias controlled sample of 137 equity funds over the period January 2004 to December 2014, which are then grouped into equally weighted portfolios according to the scheme’s origin. The Jensen’s (1968) Single-Factor model along with the Fama and French’s (1993) and Carhart’s (1997) multifactor models are employed to authenticate results and answer both research questions.

Research analysis reveals that EM exposed fund managers fail to collectively outperform the market. It thereby offers ground to believe that the emerging world is very close to being efficient, proving that the Efficient Market Hypothesis (‘EMH’) ideal exists in this scenario where market inefficiency might only be a perception of market participants as any apparent opportunity to achieve above-average returns is speedily snapped up by very active managers. Overall these managers take a conservative approach to portfolio construction, whereby they are more unperturbed investing in large cap equity funds so as to lessen somewhat the exposure towards risks associated with liquidity, stability and volatility.

Furthermore, the findings show that large-sized equity portfolios have the lead over the medium and small-sized competitors, whilst the high cost and mature collective investment vehicles enjoy an alpha which although is negative is superior to their peers. The riskiest funds generated the lowest alpha, and thereby produced doubts as to whether investors should accept a higher risk for the hope of earning higher returns, at least when aiming to gain an exposure into the emerging world.

Mutual fund performance is not an innovative topic so to speak. Nonetheless, researchers and academia have centred their efforts on appraising the behaviour of fund managers domiciled primarily in developed and more efficient economics, leaving the emerging region highly uncovered in this respect. This study, therefore aims at crafting meaningful contributions to the literature as well as to the practical perspective.

Intraday volatility characteristics throughout the trading week are examined at the emerging Borsa Istanbul (BIST) stock exchange. Using five-minute (and 15-minute) intervals, accentuated intraday volatility patterns at the microstructure level are examined during the stock market open and close in the morning and in the afternoon sessions. Volatility is highest when markets open in the morning. The second highest is during the afternoon open. The third highest is before the market closes for the day. Volatility before the market close has increased in recent years. These characteristics are seen every trading day. There are also differences: Monday returns are lowest, Friday returns are highest, and Monday morning volatility is highest of the entire trading week. Day-of-the-week and intraday accentuated volatility smile anomalies are jointly investigated using the longest intraday sample period in the emerging country stock exchange literature. Investment companies and professionals can utilize the results for risk management and hedging by avoiding highly volatile opening and closing periods. Arbitrageurs, speculators, and risk takers should trade during these highly volatile periods. Heightened volatility is increased difficulty in price discovery, thus inefficiency. Market participants, exchanges, and public prefer efficient markets. The research presents evidence of trading days, and periods during the trading day, when the exchange becomes more efficient. This is the first research that explores day-of-the-week effect from intraday volatility perspective in an emerging market, and provides useful recommendations in designing risk management strategies at market microstructure level.

Purpose: Through globalization, financial markets have become more integrated and their tendency to act together has increased. The majority of the literature states that there is a cointegration between developed and emerging markets. How do positive or negative shocks in developed markets affect emerging markets? And how do positive or negative shocks in emerging markets affect developed markets? For this reason, the aim of the study is to investigate the asymmetric causality relationship between developed and emerging markets with Hatemi-J asymmetric causality test.

Design/methodology/approach: In this study, the Dow Jones Industrial Average (DJIA) index was used to represent developed markets and the Morgan Stanley Capital International (MSCI) Emerging Market Index was used to represent emerging markets. The asymmetric causality relationship between the DJIA Index and the MSCI Emerging Market Index was investigated using monthly data between January 2009 and April 2019. In the first step of the study, the Johansen Cointegration Test was used to determine whether there is a cointegration between the markets. In the next step, the Hatemi-J asymmetric causality test was applied to see the asymmetric causality relationship between the markets.

Findings: There is a weak correlation between developed and emerging markets. This result is important for international investors who want to diversify their portfolios. As a result of the Johansen Cointegration Test, it was found that there is a long-term relationship between the MSCI Emerging Market Index and the DJIA Index. Therefore, investors who make long-term investment plans should not forget that these markets act together and take into account the causal relationship between them. According to the asymmetric causality test results, a unidirectional causality relationship from the MSCI Emerging Market Index to the DJIA Index was determined. This causality shows that negative shocks in the MSCI Emerging Market Index have positive effects on the DJIA Index.

Originality/value: This study contributes to the literature as it is one of the first studies to examine the asymmetrical relationship between developed and emerging markets. This study is also useful in predicting the short- and long-term relationship between markets. In addition, this study helps investors, portfolio managers, company managers, policymakers, etc., to understand the integration of financial markets.

Purpose – Examine the role of institutional investors in accelerating the development of capital markets and economies abroad, the determinants of their investment, both in the domestic and foreign markets, and their importance in promoting good corporate governance practices worldwide and facilitating increased financial integration.

Methodology/approach – Review and synthesize recent academic literature (1970–2011) on the process of international financial integration and the role of foreign institutional investors in the increasingly global financial markets.

Findings – Despite the concern that short-term flow of international capital can be destructive to the emerging and developing market economies, academic evidence on a destabilizing effect of foreign investment activity is limited. Institutional investors’ systematic preference for stocks of large, well-known, globally visible foreign firms can explain the presence of a home bias in international portfolio investment.

Research limitations – Given the breadth of the two literature streams, only representative studies (over 45 published works) are summarized.

Social implications – Regulators of emerging markets should first improve domestic institutions, governance, and macroeconomic fundamentals, and then deregulate domestic financial and capital markets to avoid economic and financial crises in the initial stages of liberalization reforms.

Originality/value of paper – A useful source of information for graduate students, academics, and practitioners on the importance of foreign institutional investors.

We examine the behavior of the Russian stock market as one of the leading indices of economic health, reflecting investors’ expectations about future returns. The sample period includes the global financial crisis, a recovering period, and the recent crisis in the Russian economy 2014–2015.

We assume that the Russian stock market strongly depends on the global market, but the market is not fully integrated. This chapter investigates whether specific risk factors such as high dependence of the Russian economy on oil prices and currency volatility are priced in the Russian stock market, using International CAPM with time-variant parameters and conditional heteroskedasticity. The results show that the global financial crisis has had a profound negative impact on the Russian market, and that the expected return and liquidity has declined. The risk of investing in the Russian market is estimated as higher than in the developed market and even in other emerging markets after the global recession. We find that oil price exposure and currency risk to be priced in the Russian stock market and indicate that international investors require higher compensation for bearing these risks. The price of the currency risk has decreased since the implementation of the floating exchange rate regime by the Central Bank of Russia in 2014, but still significant.

Some opportunities to overcome the present stagnation and drive for a sustainable development are discussed.

The UN Global Compact promotes values of precautionary approach to environmental changes and business sustainability, which are eagerly embraced by MNCs; however the recognized emerging country risks pose a challenge for continuous commitment to those principles in the subsidiaries. Especially political and currency risks are considered significant in the subsidiaries located in the emerging markets. Therefore, those risks are often shifted to the local partners as the pursued core principle of the risk management strategies. The objective of MNCs is in fact to limit MNCs responsibility for the liabilities and losses in the emerging markets in case of market downturns, and in effect the advocated risk management practices exacerbate the severity of the emerging market crises.

The chapter explores those corporate practices on the examples of numerous major international market players in case of several historical, but recent examples of the emerging market currency crises.

The concerns addressed in the chapter include: the preference for local financing exposing at risk local banking sectors in the emerging markets, excessive liquidity and minimal capital commitments and investments leading to weaker currency fluctuations and resulting in private capital speculations and capital flight (to safety or to quality). The intensified global competition for international investments in form of FDIs resulted in the erosion of the capital requirements, reduced social and business infrastructure commitments requested, limited currency controls, and other components of the regulatory framework easing in the emerging markets. Other identified in the research key components of the risk management strategies applied by MNCs, destabilizing the emerging markets in financial (both fiscal and currency) crises include: intercompany payments and financing such as: transfer pricing, local sourcing and reimbursements for both tangible and intangible assets transfer.

Demonstrated approach of MNCs appears ethically questionable and reflects the disparity of the bargaining powers. It also undermines the intentions of the Ten Principles of the UN Global Compact. The corporate citizenship is found difficult to dominate over the conflicting self-centered interests of MNCs operating in the emerging markets, especially in times of crises. The consideration of the non-compulsory ethically based initiative, as the alternative to the failing effectiveness of the international market regulations, requires restoration of the public and an individual value of the reputation (image, name) built on social responsibility and accountability, unfortunately so much diluted over the last two decades.

The chapter examines the effect of MNCs risk management of their foreign operations on the crises in the emerging markets with focus on inward FDIs flows and inward FDIs stock fluctuations and debt financing. The results evidence the repetitive nature of the self-interest driven corporate behavior.

While differences in stock price behaviours among developed countries have been extensively researched and documented, investigations of this nature for emerging economies are, however, much less comprehensive. We undertake a quantitative analysis that investigates six different types of panel data models to define the best one that explains the stock price behaviour of publicly traded companies in emerging countries. The research is based on a sample from Compustat Global, including 5,167 stocks of companies from 38 emerging countries, covering 119 months (1998–2007), totalling 235,621 observations. This analysis of the elasticities of regressors corresponding to stock transactions in stock markets, through a considerable sample, contributes to a deeper discussion about stock price behaviour in countries with less developed stock markets. The findings demonstrate that stock quantity and total volume traded per month significantly influence closing price behaviour over time, with more efficient estimators for the fixed effect model. Moreover, different elasticities are verified among countries. This chapter does not take into account the macroeconomic reasons why the differences among countries occur. Further, the consideration of developed countries, such as United States, United Kingdom, France or Australia, could bring the possibility of comparison of stock prices among countries in a broader perspective. Overall this analysis can help governments and private initiative for the formulation and implementation of strategic actions, in order to constantly improve the quality of their stock markets and, consequently, to increase the entry of resources destined to the development of nations.

The aim of this study is to compare volatility persistence with daily volatility and to analyze the asymmetry effect of volatilities in stock markets of emerging economies. Using daily observations of stock market indices of selected major emerging countries during the period of January 1, 2002 to December 31, 2018, the authors estimate the persistence, the half-life measure of volatility and the daily volatility of the return series using the GARCH model application. The authors also examine the leverage effect on stock market returns using the EGARCH model estimation. In addition, the authors investigate the impact of the 2008 global financial crisis on various volatility measures and the leverage effect of emerging stock market returns. The authors then examine and compare the different speeds of mean reversion, volatility persistence and leverage effects in the national stock market indices during the pre-crisis, crisis, and post-crisis periods. The authors hereby present evidence that the effects of negative shocks are significantly larger than those of positive shocks in emerging stock markets throughout their different sample periods.