Interlocking Global Business Systems: The Restructuring of Industries, Economies and Capital Markets

By Edward B. Flowers; Thomas P. Chen et al. | Go to book overview

Part II
Internationalizing Capital Markets

The four chapters in this section focus on various aspects of Asian capital markets, financial institution, securities, compensation plans and financial skills to provide useful accounts of the different ways in which global capital markets are becoming more international.


Why Do Emerging Capital Markets Exist?

This chapter seeks to find out why emerging capital markets are able to compete with the world's major capital markets despite the fact that they have much higher costs of capital. To do this, Flowers compares the stock markets in Jamaica, Taiwan and the United States using general autoregressive conditional heteroskedasticity (GARCH) and threshold general autoregressive conditional heteroskedasticity (TARCH) risk forecasting models. These models are used to describe the different qualities of capital market risk. The difference in qualities of risk indicate that these markets process information differently, form expectations differently and have different volatility responses to good and bad news. These differential responses to news may provide an explanation for the continued segmentation of the world's stock markets despite a pronounced trend toward the merger of global capital markets on a basis of price and risk.

If it is necessary to diversify portfolios across different qualities of risk not measured by either the capital asset pricing (CAPM) or the arbitrage pricing theory (APT) models, the continued segmentation of smaller emerging markets would provide a useful means to diversify away this risk. This would be true even though the larger capital markets appear to have lower costs of capital according to CAPM and APT models. This appearance may be deceiving because the CAPM and APT models may have understated financial risk by failing to specify the risk factors described by the GARCH and TARCH models.


How Can You Hedge the Risk of Asian Markets?

K. C. Chen's chapter explores the pricing efficiency of Hong Kong Index Warrants traded on the American Stock Exchange. Chen finds that some pricing

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