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

This result suggests, for the United States, a process of building expectations that might produce a phenomenon like the 1993 bubble in Jamaica's stock market.


Response to New Information

The conclusion that the price volatility of the Jamaican and Taiwanese markets responds relatively more to new information than to previous volatility than does the U.S. market is surprising. The U.S. market is larger and more developed than the Jamaican and Taiwanese markets and might be expected to be more efficient in the sense that it responds more quickly to new information than the two smaller markets. However, these statistics don't support that conclusion.


Information Diffusion

Insider Trading

One might speculate that Jamaican and Taiwan market variance responds more to new information because there is more insider trading in the U.S. market than there is in Jamaica. Another way of stating this might be to say that a larger proportion of the market participants in the U.S. market is more sophisticated because they have better sources of information than the market as a whole.


More Accurate P/Es?

The stronger response of the Jamaican and Taiwanese markets to information may also indicate that information, rather than expectational momentum, is fueling price changes in the Jamaican and Taiwanese markets. If this is true, the price/earnings ratios of stocks in both Jamaica and Taiwan may be more accurate than they are in the United States. In the case of Taiwan, this new information has driven the market up 42% over the last twenty months. In Jamaica, new information has not been so kind and their market has fallen at an annual compound rate of from 13 to 31% since the 1993 bubble, depending on what part of the 1993 decline you choose to use as a reference.

In any case, the GARCH results indicate that the information diffusion process of the Jamaican and Taiwanese markets is significantly different from that in the United States.


CONCLUSIONS

Markets Process Information Differently

This study indicates that all three of these markets--Jamaican, Taiwanese and United States--process information differently, form expectations differently and have different volatility responses to good and bad news.

-87-

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