Merging But Different, Emerging Markets Persist
Edward B. Flowers
A number of studies have shown that the world's stock markets are merging into a global capital market linked by rapid communications and characterized by market efficiency. We also know that if a corporation lists its stock in a larger, more efficient market, it will be able to get capital at a lower cost. Since this situation is becoming the world norm, one might ask why the smaller equity markets have not been supplanted by the larger markets. This chapter uses general autoregressive conditional heteroskedasticity (GARCH) and threshhold autoregressive conditional heteroskedasticity (TARCH) analysis of the price variance of the stock indexes of three capital markets, those in the Jamaica, Taiwan and United States, to provide a description of markets which contrast statistically with one another in ways other than price versus risk. The study finds that these markets process information differently, form expectations differently and have different volatility responses to good and bad news. The research suggests that small and medium-sized stock markets may continue to compete with larger markets by providing investors with the option of alternative market behaviors even if all markets continue to merge on a basis of price and risk.
The studies of Bekaert ( 1995), Buckberg ( 1995), Claessens ( 1995) and Khoo and Horowitz ( 1996) have shown that the world's emerging stock markets are merging into a global capital market linked by rapid communications and characterized by market efficiency. Wheatley ( 1988), Harvey ( 1991) and Chan et al. ( 1992) use the capital asset pricing model (CAPM) to provide evidence