The Risk of Holding Periods across International Stock Exchanges

By Nowak, A. Z.; Winkler-Drews, T. et al. | International Journal of Business, Spring 2015 | Go to article overview

The Risk of Holding Periods across International Stock Exchanges


Nowak, A. Z., Winkler-Drews, T., Shachmurove, Yochanan, International Journal of Business


I. INTRODUCTION

Over the past three decades, financial markets have experienced unprecedented transformations, signs of which emerged in the late 1970s. In the 1980s, deregulation led to integration of financial markets, increasing competitiveness, and the gradual emergence of financial innovation. The rapid development of information and communication technologies in the 1990s contributed to the liberalization, internationalization, and growth of financial markets (Budd, 2011). Towards the end of the 1990s, cross-border investments occurred mainly between the United States (U.S.), Western Europe and, to a lesser extent, Japan (Clark, 2007). Currently, investment flows are still concentrated among the three, although the importance of other areas has been growing.

In recent years, substantial consolidation took place. The largest stock exchanges took over smaller ones, resulting in more concentrated transactions (Greasley, 2011). In 2011, 75% of the world's share trading was done at four major stock exchanges, the New York Stock Exchange (NYSE), the London Stock Exchange (LSE), Euronext, and the Tokyo Stock Exchange (Tokyo SE). Note that the holding companies of the NYSE and Euronext merged in 2007. These developments have generated changing risks, various dimensions of which have been analyzed. See de Araujo and Garcia (2013) for risk spillover among major stock exchanges, Liang and Wei (2012) on global liquidity risk, and Esqueda et al. (2012) about reduced volatility in emerging markets (Silver, 1995).

This paper presents the evolution of the level of risk for the leading five stock exchanges--NYSE, LSE, Euronext, Deutsche Borse, and Tokyo SE--from 1950 to 2012. The accepted measure of risk is the unitized risk values (variation coefficients) for the real rate of return. Risk levels are designated for holding periods of 1 to 30 years. The study uses monthly data from the Global Financial Database (www.global financialdata.com).

The remainder of the paper is organized as follows. Section II through Section VI analyzes the U.S., United Kingdom (U.K.), German, French, and Japanese markets. Section VII briefly concludes.

II. THE U.S. MARKET

With its robust economic growth during World War II, the U.S. enjoyed a post-war period of economic supremacy over other capitalist countries. The arms race arising from the outbreaks of the Cold War and the Korean War added further momentum (the Korean boom). During the period between 1950 and 1953, the U.S. industrial production increased by 41%. The end of the Korean War led to a decrease in government budget expenditures, which was accompanied by a short recession from 1953 to 1954. Inflation triggered another recession from 1957 to 1958. Expanding industrial production in the 1950s triggered a high rate of economic growth (Bordo, 2012).

Scientific and industrial research, propelled by the arms race, revitalized the economy in the 1960s. Although financing the "Great Society" programs, the space exploration missions and the Vietnam War generated budget deficits and inflation. After 1969, fighting inflation became the main goal -Keynesianism gave way to monetarism--but to no avail as stagflation, a combination of low growth and high inflation, crippled in.

During the years 1950 until 1973, the U.S. Gross Domestic Product (GDP) grew at 3.9% annually, growth in industrial production was 5.3% and inflation was at the 2.7% rate. The first oil crisis occurred in 1974 until 1975. The crisis slowed down the U.S. economy, increasing both unemployment and inflation. In 1977, under President Carter, a plethora of social programmes were initiated, which only worsened the situation. In 1980, the inflation rate was 13.5%. In 1981, when President Reagan took office, the inflation rate fell to 10.3%. President Reagan introduced deregulation and spent heavily on defence programs including the "Star Wars" missile defence system. …

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