- Ramana Ramaswamy, Jorge Roldos, Donald Mathieson, and Anna Ilyina
- Published Date:
- April 2004
2000, Comparing financial Systems (Cambridge, Mass.; MIT Press).
Bank for International Settlements, 2002a, The Development, of Bond Markets in Emerging Economies, BIS Papers No. 11 (Basel; BIS).
Bank for International Settlements, 2002b, Triennial Central Bank Survey: Foreign Exchange and Derivatives Market Activity in 2001, March.
Bank for International Settlements, 2002c, Quarterly Review, June.
2001, “A Compromise Solution,”Latin Finance (October), pp. 40–43.
2001, “Stock Markets, Banks and Growth; Correlation or Causality?”World Bank Policy Research Working Paper No. 2760 (Washington: World Bank, September).
2001, “The New Economy and Global Stock Returns,”IMF Working Paper No. 00/216 (Washington: International Monetary Fund).
2002, “The Evolution of Exchange Rate Regimes Since 1990: Evidence from De Facto Policies,”IMF Working Paper No. 02/155 (Washington: International Monetary Fund).
2001, “Hedging and Financial Fragility in Fixed Exchange Rate Regimes, European Economic Review, Vol. 45 (June), pp. 1151–93.
2002, “Coping with Chile’s External Vulnerability: A Financial Problem,” in Economic Growth: Sources, Trends, and Cycles, ed. by NormanLoayza and RaimundoSoto (Santiago, Chile: Central Bank of Chile).
2003, “Excessive Dollar Debt: Financial Development and Underinsurance,”Journal of Finance, Vol. 58 (April), pp. 867–93.
1998, “Capital Flows and Capital Market Crises: The Simple Economics of Sudden Stops,”Journal of Applied Economics, Vol. 1 (November), pp. 35–54.
1999, “Contagion in Emerging Markets: When Wall Street Is the Carrier,”Available on the Internet at http://www.bsos.umd.edu/econ/ciecalvo.htm.
2000, “Capital Markets and the Exchange Rate; With Special Reference to the Dollarization Debate in Latin America,” (unpublished: Center for International Economics, University of Maryland).
2000, “When Capital Inflows Suddenly Stop: Consequences and Policy Options,” in Reforming the International Monetary and Financial System, ed. by Peter B.Kenen and Alexander K.Swoboda (Washington: International Monetary Fund).
1996, “A Scoreeard for Indexed Government Debt,” in NBER Macroeconomics Annual (Cambridge: MIT Press).
2003, “Polling Mexico’s Pension Funds,”Credit Suisse First Boston (CSFB) Emerging Market Economics.
2002, “Analysis of the Sluggish Development of the Secondary Market for Korean Government Bonds, and Some Proposals” (unpublished; Seoul: The Bank of Korea, Financial Markets Department, May).
forthcoming, “A Comparative Study of Sovereign Risk Measures, IMF Working Paper (Washington: International Monetary Fund).
1999, “Do Foreign Investors Destabilize Stock Markets? The Korean Experience in 1997.”Journal of Financial Economics, Vol. 54 (October), pp. 227–64.
2002, “Capital Markets in Chile: from Financial Repression to Financial Deepening,”in BIS Papers No. 11, (Basel: BIS).
1998, “Who Controls East Asian Corporations?”World Bank Policy Research Working Paper No. 2054 (Washington; World Bank).
2002, “Explaining the Migration of Stocks from Exchanges in Emerging Economies to International Centers,”World Institute for Development Economic Research (WIDER) Discussion Paper No. WOP 2002/94. (Helsinki: United Nations University—WIDER).
2001, “The Vanishing Equity Premium,”The Region, Federal Reserve Bank of Minneapolis (June).
2002, “Junior Can’t Borrow: A New Perspective of the Equity Premium Puzzle,”Quarterly Journal of Economics, Vol. 117, (February), pp. 269–96.
Credit Suisse First Boston/Tremont website: http://www.tremont.com.
Deutsche Bank, 2000, “CE-3 Domestic Bond Markets,”Global Markets Research.
Deutsche Bank, 2001a, “Emerging Market Credit Derivatives,”Global Markets Research.
Deutsche Bank, 2001b, “The Malaysian Bond Market,”Global Markets Research.
Deutsche Bank, 2003, “Emerging Markets Credit Derivatives” (May).
2001, “The Role of Derivatives in the East Asian Financial Crisis,”Economic Strategy Institute, The Derivatives Study Center, http://www.econstrat.org.
1996, “A Survey of the Literature on Controls over International Capital Transactions,”IMP Staff Papers, International Monetary Fund. Vol. 43, (December), pp. 639–87.
2000, “A Model of Crises in Emerging Markets,”The Economic Journal, Vol. 110 (January), pp. 256–72.
1999, “Credit Swap Valuation,”Financial Analyst Journal, Vol. 55 (January/February), pp. 73–87.
1999, “Exchange Rates and Financial Fragility,”NBER Working Paper No. 7418 (Cambridge, Mass.: National Bureau of Economic Research).
2002, “Original Sin: The Pain, the Mystery, and the Road to Redemption”paper presented at the IDB Conference, “Currency and Maturity Matchmaking: Redeeming Debt from Original Sin (November).and Ugo Panizza
Emerging Markets Investor, 2001, “Thinking Global, Buying Local.”Vol. 8 (September), Issue 8.
Euroweek, 2001, “Converging Europe and Domestic Bond Markets” (September) Supplement.
1999, “Self-Protection for Emerging Market Economies,”NBER Working Paper No. 6907 (Cambridge, Mass.: National Bureau of Economic Research).
2001, “Exchange Rate Regimes: Is the Bipolar View Correct?”Journal of Economic Perspectives, Vol. 15 (Spring), pp. 3–24.
1996, “Country Fund Discounts and the Mexican Crisis of 1994; Did Local Residents Turn Pessimistic Before International Investors?”Open Economics Review, Vol. 7 (Supplement 1), pp. 511–34.
1998, “Derivatives in International Capital Flows,”NBER Working Paper No, 6623. (Cambridge, Mass.: National Bureau of Economic Research).
1999, “Lessons from the Global Crises,”Remarks before the World Bank Group and the International Monetary Fund, Annual Meetings Program of Seminars, Washington. September27. Available on the Internet at http://www.federalreserve.gov/Boarddocs/Speeches/1999/199909272.htm.
2002, “Bond Markets and Banks in Emerging Economies,” in The Development of Bond Markets in Emerging Economies, BIS Paper No. 11 (Basel: Bank for International Settlements).
Hong Kong Monetary Authority (HKMA), 2001, “Cost-Benefit Analysis of Developing Debt Markets,”Quarterly Bulletin (November).
International Monetary Fund, 1995, International Capital Markets: Developments, Prospects, and Key Polity Issues, World Economic and Financial Surveys (Washington).
International Monetary Fund, 1998a, World Economic Outlook and International Capital Markets: An Interim Assessment, World Economic and Financial Surveys (Washington).
International Monetary Fund, 1998b, International Capital Markets Developments: Prospects, and Key Policy Issues, World Economic and Financial Surveys (Washington).
International Monetary Fund, 1999, International Capital Markets: Developments, Prospects, and Key Policy Issues, World Economic and Financial Surveys (Washington).
International Monetary Fund, 2000, International Capital Markets: Developments, Prospects, and Key Policy Issues, World Economic and Financial Surveys (Washington).
International Monetary Fund, 2001, International Capital Markets: Developments, Prospects, and Key Policy Issues, World Economic and Financial Surveys (Washington, August).
International Monetary Fund, 2002a, Global Financial Stability Report, World Economic and Financial Surveys (Washington, March).
International Monetary Fund, 2002b, Global Financial Stability Report, World Economic and Financial Surveys (Washington, June).
International Monetary Fund, 2002c, Global Financial Stability Report, World Economic and Financial Surveys (Washington, September).
International Monetary Fund, 2002d, Global Financial Stability Report, World Economic and Financial Surveys (Washington, December).
International Monetary Fund, 2003a, “Exchange Arrangements and Foreign Exchange Markets Developments and Issues,”World Economic and Financial Surveys (Washington: International Monetary Fund).
International Monetary Fund, 2003b, “Financial Stability in Dollarized Economies,” (unpublished; Washington: Monetary and Exchange Affairs Department, International Monetary Fund).
International Monetary Fund, 2003c, Global financial Stability Report, World Economic and Financial Surveys (Washington, September).
2002, “Why Do Emerging Economies Borrow in Foreign Currency?”paper presented at an IMF Research Department Seminar (Washington, March6).
2004, “Privatization and Corporate Governance,” in Governance, Regulation, and Privatization, in the Asia Pacific Region, ed. by TakatoshiIto and Anne O.Krueger (Chicago: University of Chicago Press).
2001, “Derivatives and Macro-economic Management in Post-Crisis Asia” (Monetary Authority of Singapore).
2002, “Foreign Portfolio Investors Before and During a Crises,”Journal of International Economics, Vol, 56 (January), pp. 77–96.
1998, “Derivatives and Global Capital Flows: Applications to Asia,”Cambridge Journal of Economics, Vol. 22, pp. 677–692.
2000, “Investor Protection and Corporate Governance,”journal of Financial Economics, Vol. 58 (Issues 1–2). pp. 3–27.
2001, “Size and Structure of the World Bond Market: 2001,”Global Fixed Income Strategy.
2002, “Size and Structure of the World Bond Market: 2002.”Global Fixed Income Strategy.
2001, “Gagged, Pressured and Compromised.”Asiamoney, (October), pp. 17–21.
Moody’s Investors Services, 2001, “Asia’s Domestic Capital Markets: Works in Progress,”Special Comments, Global Credit Research.
Moody’s Investors Services, 2002, “Malaysia’s Debt Capital Markets Assume New Importance,”Special Comments, Global Credit Research.
Organization for Economic Cooperation and Development, 2001, “Bond Market Development in Asia” (Paris: OECD).
2001, “What Makes Stock Exchanges Succeed? Evidence from Cross-Listing Decisions,”CEPR Discussion Paper No, 2683 (London: Centre for Economic Policy Research).
2003, Effects of Financial Globalization on Developing Countries: Some Empirical Evidence, Occasional Paper No. 220 (Washington: International Monetary Fund).Kenneth Rogoff Shangjin Wei Ayn Kose
2002, “Credit Derivatives in Emerging Markets” (unpublished; New York: New York University, Stern School of Business).
2002, “The Modern History of Exchange Rate Arrangements: A Reinterpretaiion,”NBER Working Paper No. 8963 (Cambridge, Massachusetts: National Bureau of Economic Research).
2003, “Pension Reform and Capital Markets” (unpublished; Washington: International Monetary Fund).
1998, “Fixed Income Markets in the United States, Europe, and Japan: Some Lessons for Emerging Markets,”IMF Working Paper No. 173/98 (Washington: International Monetary Fund).
2000, Modern Banking and OTC Derivatives Markets; The Transformation of Global Finance and Its Impliialinns for Systemic Risk, IMF Occasional Paper No. 203 (Washington: International Monetary Fund).
2000, “The Underlying Constraints on Corporate Bond Market Development in South East Asia.”United Nations, DESA Discussion Paper No. 14 (September).
2001, “Stock Exchanges. Access Fees, and Competition,”Bank of Finland Discussion Paper No. 22.
2001, “Borderless Trading and Developing Securities Markets,” in Open Doors: Foreign Participation in Financial Systems in Developing Countries, ed. by Robert E.Litan, PaulMasson, and MichaelPomerleano (Washington: Brookings Institution Press).
2002, “The Chilean Experience with Completing Markets with Financial Indexation.” in Inflation and Monetary Policy, ed. by Le-Fort and Schmidt-Hebbel (Santiago: Central Bank of Chile).
World Bank, and IMF, 2001, Developing Government Bond Markets: A Handbook (Washington: World Bank).
2001, “Developing and Positioning Hong Kong’s Bond Market,”Speech delivered at the Forum on China’s Government Securities Market in the New Century (Hong Kong, November19). Available on the Internet at http://www.info.gov.hk/hkma/eitg/sfieeilies/index.htm.
World Economic and Financial Surveys
This series (ISSN 0258-7440) contains biannual, annual, and periodic Studies covering monetary and financial issues of importance to the global economy. The core elements of the series are the World Economic Outlook report, usually published in May and October, and the semiannual Global Financial Stability Report. Other studies assess international trade policy, private market and official financing for developing countries, exchange and payments systems, export credit policies, and issues discussed in the World Economic Outlook. Please consult the IMF Publications Catalog for a complete listing of currently available World Economic and Financial Surveys.
World Economic Outlook: A Survey by the Staff of the International Monetary Fund
The World Economic Outlook, published twice a year in English, French, Spanish, and Arabic, presents IMF staff economists’ analyses of global economic developments during the near and medium term. Chapters give an overview of the world economy; consider issues affecting industrial countries, developing countries, and economies in transition to the market; and address topics of pressing current interest.
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2003. (April). ISBN 1-58906-212-1. Stock #WEO EA 0012003.
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Exchange Arrangements and Foreign Exchange Markets: Developments and Issues
by a staff team led by Sitogo Ishii
This study updates developments in exchange arrangements during 1998-2001. It also discusses the evolution of exchange rate regimes based on de facto policies since 1990, reviews foreign exchange market organization and regulations in a number of countries, and examines factors affecting exchange rate volatility.
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Official Financing: Recent Developments and Selected Issues
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This study provides information on official financing for developing countries, with the focus on low-income countries. It updates the 2005 edition and reviews developments in direct financing by official and multilateral sources.
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Exchange Rate Arrangements and Currency Convertibility: Developments and Issues
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A principal force driving the growth in international trade and investment has been the liberalization of financial transactions, including the liberalization of trade and exchange controls. This study reviews die developments and issues in die exchange arrangements and currency convertibility or IMF members.
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These studies, supporting analyses and scenarios of the World Economic Outlook, provide a detailed examination of theory and evidence on major issues currently affecting the global economy.
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The Global Financial Stability Report, published twice a year, examines trends ancl issues that influence world financial markets. It replaces two IMF publications—the annual International Capital Markets report and the electronic quarterly Emerging Market Financing report. The report is designed to deepen understanding of international capital flows and explores developments that could pose a risk co international financial market stability.
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International Capital Markets: Developments, Prospects, and Key Policy Issues (back issues)
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2001. ISBN 1-58906-056-3. Stock #WEO EA 0062001.
Toward a Framework for Financial Stability
by a stall team led by David Folkens-Landau and Carl-Johan Lindgren
This study outlines the broad principles and characteristics of Stable and sound financial systems, to facilitate IMF surveillance over banking sector issues of macroeconomic significance and to contribute to the general international effort to reduce the likelihood and diminish the intensity of future financial sector crises.
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1998. ISBN 1-55775-706-2. Stock #WEO-016.
Trade Liberalization in IMF-Supported Programs
by a staff team led by Robert Sharer
This study assesses trade liberalization in programs supported by the IMF by reviewing multiyear arrangements in the 1990s and six detailed case studies. It also discusses the main economic factors affecting trade policy targets.
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1998. ISBN 1-55775-707-0. Stock #WEO-1897.
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Feldstein (1999) encouraged emerging markets to accumulate reserves as insurance against the disruptive financial effects of an abrupt reversal of capital flows. According to Greenspan (1999), the Deputy Finance Minister of Argentina, Pablo Guidotti, proposed that the level of usable reserves should exceed the one-year scheduled amount of foreign currency debt amortization (assuming no rollovers). Greenspan (1999) extended Guidotti’s proposal by arguing for a “liquidity-at-risk” standard that would require a country to hold liquid reserves sufficient to ensure that it could avoid new borrowing for one year with a certain ex ante probability, such as 95 percent.
Moreover, the ratio of emerging markets’ foreign exchange reserves to nominal GDP at the end of 2002 was at the highest level since 1990. Similar results hold for the ratios of reserves to imports and reserves to broad money (M2).
IMF (2003a) reported, for example, that during 1998–2000, the number of countries maintaining controls on both current and capital account transactions remained relatively unchanged (falling from 74 percent to 70 percent of all IMF members). Moreover, although the overall use of capital controls did not change, a growing number of countries began to regulate selected transactions. In particular, the number of countries maintaining controls on institutional investors rose sharply. While many of these controls were prudential in nature (such as limits on purchase of foreign assets), some specified the channels’ markets, and/or institutions for permitted cross-border transactions.
For example, Bubula and Ötker-Robe (2002) found that between 1995 and 2001 the proportion of emerging markets with de facto floating exchange rates rose from 9 percent to 50 percent. At the same time, the proportion of countries with a hard peg also rose from 9 percent to 16 percent. This evidence is consistent with what Fischer (2001) described as the “hollowing out” of exchange rate arrangements. However, Reinhart and Rogoff (2002) argue that the shift in exchange rate arrangements has been much more complex than indicated by official classifications. Their analysis suggests that many official pegs were de facto much more flexible and conversely that many floating exchange rates showed considerable rigidity.
Drawing on lessons from recent emerging markets crises, Greenspan (1999) noted that well-developed bond markets can act like a “spare tire” and substitute for bank lending as a source of corporate funding when bank lending dries up.
The economies include China, Hong Kong SAR, Malaysia, Singapore, Korea, Thailand, Argentina, Brazil, Chile, Mexico, the Czech Republic, Hungary, and Poland. The countries were selected on the basis of the availability of data on corporate bond issuance. The data on local bond issuance cover various types of instruments, including fixed interest rate bonds, floating interest rate bonds, and bonds indexed to such items as the price level or the exchange rate. In general, it is not feasible to segment the data by type of instrument.
The public sector is defined as the central government, government-owned financial institutions, and public sector enterprises.
Indeed, a strong banking system is likely to play a key role in facilitating the development of local securities and derivatives since banks in emerging markets often are key underwriters of securities, investors in bonds, providers of credit to securities houses, and suppliers of over-the-counter derivative products.
Even in the mature markets, the low credit risk and high liquidity features of government securities have made them natural providers of benchmark interest rates (see IMF, 2001).
The Mexican Congress has also approved the use of derivatives, but the pension funds still have to comply with some prudential rules and operating requirements (see Cervera and Quedry, 2003).
See La Porta and others (2000). Corporate governance and the development of local capital markets have been associated with macroeconomic outcomes such as output growth and the severity of exchange rate crises and output volatility (see Johnson and Shleifer, 2004, and references therein).
See, for instance, La Porta and others (2000) and references therein. The authors provide measures of investor protection for 49 countries and classify them by legal origin. Besides the provision of adequate (clear and regular) information about firm performance and external audits, investor protection is usually measured by the voting rights of minorities, their ability to exercise their vote by mail and call extraordinary shareholder meetings, to participate in executive boards and have mechanisms to sue or get relief from board decisions, as well as preemptive rights to new issues and tag-along rights in the case of changes in control—to protect them from dilution by controlling shareholders.
The system was devised with the aim of providing family-owned companies an incentive to list while retaining control—indeed, ownership of 17 percent of a company would ensure control. See Barham (2001).
Market participants, however, doubt that many corporates will take advantage of this provision as the large pension funds may have reduced incentives to invest in an opted-out company.
While most of the issues discussed in this section refer to equity markets, weak transparency and corporate governance are also a significant constraint for the development of corporate bond markets (see Sharma, 2000).
The nominalization of the short end of the curve has deprived the fixed-for-floating UF interest rates swap market of the reference rate for the floating leg of the transaction.
A credible monetary policy framework and a credible commitment not to bail out debtors are obvious policy implications of these analyses.
The argument applies equally to bank lending as to local bonds. Caballero and Krishnamurthy (2003) show that the limited development of local financial markets also reduces the incentives for foreign specialists—who would be willing to bring foreign capital to lend against domestic currency collateral—to enter the local market, reinforcing the underinsurance problem.
Eichengreen, Hausmann, and Panizza (2002) note that transaction costs in a world of heterogeneous countries and network externalities may give a small number of vehicle currencies a special attractiveness.
Similar issues arise in economies with dollarized deposits; see IMF (2003b) for a discussion of prudential and crisis management aspects of dollarized banking systems.
Experience shows that the CPI is less volatile than the exchange rate, especially during crises; price indexation is also a superior alternative to indexation through floating interest rates, as the latter are also quite volatile in emerging markets.
These concerns are particularly serious in the case of small stock markets. See IMF (2002a) for further details on domestic equity markets as a source of funding and an investment alternative for international investors. Structural issues in global and emerging equity markets are dealt with in IMF (2001).
Claessens, Klingebiel, and Schmukler (2002) show that countries that follow these types of policies tend to have larger and more liquid stock exchanges. However, they also show that as such fundamentals improve, the degree of migration to other exchanges also increases.
Pagano and others (2001) also show that the need for greater liquidity appears to be one of the most important factors in the decision to cross list shares and issue American Depository Receipts/Global Depository Receipts.
The focus here is on structural policies. The issue of official intervention in stock and bond markets in the context of speculative attacks is dealt with in Chapter V of IMF (1999).
Positive feedback traders are those that buy past winners and sell past losers; negative feedback traders (or contrarians) follow the opposite trading strategy.
By end-December 2002, U.S.-dollar-linked debt had fallen to $40 billion (from $77 billion the previous year), while the level of swaps outstanding had reached $26 billion.
The availability of derivative instruments and markets to trade them should not be confused with the availability of an abundant supply of “hedge”—the latter being related to the credibility of macroeconomic policies and the willingness to take one side of the market.
The authors caution, however, against attempts to follow this path—namely to reverse the opening of the capital account—for countries that have followed alternative sequencing strategies.
Chile is sometimes mentioned as an example; see Cifuentes, Desormeaux, and Gonzalez (2002).
Yuan (2000) shows that issuance of sovereign bonds in international markets creates informational externalities that improve the liquidity of corporate bonds.
These include work aimed at developing local bond markets by APEC, the ASEAN+3 group, and a recent proposal by the Asian Cooperation Dialogue (ACD). The latter would involve a set of Asian governments launching a regional bond fund, financed by Asian central banks, that would “catalyze” larger investments from institutional investors and would invest initially in U.S. dollar, euro, and other nonregional currency bonds, later diversifying into local currency bonds from government and corporate issuers.
See Greenspan (1999). However, while bond markets and banks have served as backup forms of financial intermediation in the United States, empirical evidence for a broader set of countries shows a positive correlation between bank lending and bond issuance—see Hong Kong Monetary Authority, HKMA (2001).
As in previous reports, only a select sample of emerging markets is covered in this chapter. These countries are those that have been visited by the stall in the past two years, and where information on recent developments is most up-to-date.
As yields in Singapore Government Securities (SGS) have generally been lower than those of G-7 securities, the costs of developing the market—including those of managing securities issuance and operating the SGS trading system—are likely to have been rather small.
As a result of this strategy, foreign currency debt as a percent of total government securities declined from 53 percent in 1997 to 42 percent in 2001 in Poland, and from 41 percent to less than 30 percent in Hungary in the same period.
As most Korean corporated bonds were guaranteed by banks, some analysts considered the bond market to be an extension of the banking system.
Some market participants disagree with the standardization of contracts, as they may constrain the issuers ability to accommodate company-specific financing needs.
Firm underwriting is an arrangement whereby investment banks make outright purchases from the issuer of the securities and they sell them at a profit or loss depending on market conditions; under alternative arrangements,
In the last quarter of 2002 volumes in local instruments surpassed those in external instruments for the first time since the survey was conducted.
Emerging Markets Trade Association (EMTA) data have the advantage of a common methodology across countries, but the fact that a large fraction of reporting firms are international banks means that sometimes individual country data differ from local sources. In particular, the latter show continued growth in trading volumes in Korea and Thailand, in contrast to Table 7.
Foreign ownership of government securities continued to increase in the second half of 2002 and early 2003—especially after the Irish referendum—reaching almost 40 percent in Hungary and 20 percent in Poland.
Further moves toward accession continue to underpin the attractiveness of convergence plays, while loose macroeconomic policies and uncertain exchange rate outlooks undermine them.
This may be, in part, due to the fact that foreign investors take positions in local bond markets through total return swaps, and the actual bond holding is registered with a local bank.
While the daily trading volume of indexed bonds was just 10 billion pesos (with an outstanding stock of 349 billion pesos), the corresponding figure for fixed-rate bonds was 140 billion pesos (for an outstanding stock of 107 billion pesos) in March 2002.
For many global investors, the benchmark used to measure emerging equity markets returns is the S&P/IFCI composite index. It is U.S. dollar based, excludes stocks that foreign investors are restricted from buying in emerging markets, and adjusts for float, liquidity, and market Capitalization. An alternative benchmark index for emerging market investors is the MSCI Emerging Market Free (EMF). The main difference between the two indices is that the MSCI EMF attempts to proxy the industry coverage of the local index, while the IFCI composite includes stocks solely on liquidity and accessibility considerations. Both indices are used extensively as benchmarks by emerging market funds and are highly correlated.
The Sharpe ratio equals the difference between the return on an instrument and a risk-free rate of return divided by the standard deviation of the return on the instrument.
Focusing on individual countries rather than the entire index for diversification purposes would not have helped matters. As noted earlier, dedicated emerging market funds have done no better than the index; there has been a high correlation of returns among emerging stock markets through much of the 1990s.
For instance, while the Thai baht depreciated by 38 percent over the 12 months to May 1998, the stock market declined by 66 percent in U.S. dollar terms; similarly, the Indonesian rupiah depreciated by 78 percent over that same period, while the dollar value of the stock market fell by 88 percent.
For instance, the Thai component of the IFCI has a price earnings ratio of 35 currently, while it is about 10 on the local stock market index; in Malaysia, the local stock market price-earnings ratio is 22, while the IFCI component of the country index has a price/earnings ratio of 52.
Indeed, the typical risk-return profile of ADRs is not very different from that of locally listed stocks because of arbitrage.
The trend toward internationalization of equity markets, which includes delistings, ADR issuance, dual listings and other phenomena, is discussed in IMF (2000); the shift of liquidity toward financial centers and consolidation of exchanges is described in IMF (2001).
See, for instance, Beck and Levine (2001). They argue that stock markets act as an offset to the monopoly power exercised by banks, and the competitive nature of the stock markets encourages innovative growth-enhancing activities as opposed to the more conservative intermediation approach of banks.
Based on the BIS quarterly reports.
This restriction is similar to the Korean “real demand principle.” It was aimed at limiting speculative activity, but was never strictly enforced until late 2001.
For example, the uncertainly about the enforceability of close-out netting provisions in an insolvency scenario is often mentioned as one of the factors that hampered the development of the OTC market in Brazil.
While in the OTC market, the derivative product is guaranteed by the issuer, the contracts listed on an exchange are guaranteed by the exchange. Thus, in the latter case, the counterparty risk is typically lower. Other advantages of using standardized derivative products offered by organized exchanges include faster execution, easier liquidation of contracts, and lower transaction costs.
The increase in the average daily trading volume of the KOSPI 200 options was even more stunning—from 1.6 million contracts in December 2000 to 9 million contracts in December 2002 (all contract volumes are based on file information provided by the FOW TRADE data).
Given that equity index derivative contracts traded on KSE are of a significantly smaller size than those traded on major exchanges, KSE is not considered in the BIS global ranking of exchanges. However, according to the BIS quarterly survey, KSE is the largest derivatives exchange in the world based on the number of contracts traded.
These instruments typically provide for a minimum principal amount to be repaid to investors and a variable return amount based on the performance of an index or a portfolio of securities.
Both estimates exclude emerging Asia. Deutsche Bank is believed to be the largest broker-dealer in the emerging market credit derivatives.
A credit default swap is a financial contract under which the protection buyer pays a periodic fee (expressed in basis points per notional) in return for a payment by the protection seller contingent on the occurrence of a credit event. A credit-linked note is a security with principal and/or coupon payments linked to the occurrence of a credit event with respect to reference entity (i.e., it is a structured note with an embedded default swap). In a synthetic collateralized debt obligation (CDO), the issuer of notes (protection buyer) is typically either a special purpose vehicle or a bank and the payments are usually linked to a portfolio (which may be actively managed) of default swaps referencing a variety of credit risks. The proceeds from issuance of CDOs are reinvested in a collateral consisting of highly rated government securities, which is used to pay interest and principal on the notes.
This is based on the emerging markets credit derivatives survey conducted by the Emerging Markets Trading Association (EMTA) and released in May 2003. The questionnaire requested notional values of all credit derivatives traded during the period from January 1 to March 31, 2003. A total of 22 internationally active banks participated in the survey (excluding Deutsche Bank).
For example, J.P. Morgan has recently launched the Emerging Markets Derivative Index (EMDI), which is a basket of 19 sovereign CDSs. Separately, Merrill Lynch has launched the Asia-Liquid Indexed Credits (Asia-LINC), with 25 reference entities in the basket representing corporate credits from China, Hong Kong SAR, India, Korea. Malaysia, Philippines, Singapore, Taiwan Province of China, and Thailand.
An obvious disadvantage is that as with any insurance contract, no payout occurs if protection expires before the credit event.
The existence of a liquid corporate bond market is critical because the CDS counterparties use the underlying bond market to hedge their swap positions. In addition, the type of reference obligations most commonly included in a CDS contract is “bonds,” and less often “bonds and loans” or “specified obligations.”
This move was intended to result in a more efficient pricing of both instruments and a reduction of the transaction costs for end users of these instruments, with mutual funds being the main users of the real-denominated bonds, and with local corporates being the main users of currency hedges. Before March 2002, Brazilian corporates had to pay a premium to the financial intermediaries for transferring the U.S. dollar hedge component of the U.S. dollar-linked bond to them through currency swap arrangements. Of course, the fact that the BCB became the main supplier of currency hedge to corporates did not remove the currency risk, but rather shifted the risk to the BCB. The question of how the BCB should manage this risk without adverse implications for exchange rate or macroeconomic stability is beyond the scope of this chapter.
The term “convergence trade” refers to a bet that the local inflation rate (and thus long-term interest rates) in an emerging market will converge to a particular developed market rate (in the United States or in the EU) within a certain period of time or as economic integration progresses.
This exercise uses monthly time series of foreign purchases of local shares (from Bloomberg) and trading volumes in local equity and foreign exchange derivatives markets (from the FOW TRADE data).
See the notes on the index methodology on http://www.tremont.com.
“Basis” is the difference between bond spread (over LIBOR) and the CDS premium for the same credit/same maturity.
An important feature of CLNs is that they can be issued in Euroclearable form and listed on international exchanges. In contrast to CDSs, which do not pay the protection buyer until a credit event occurs, the credit-linked notes allow the protection buyer to receive cash payment at the time of the issuance of the notes, and thus eliminate the counterparty credit risk inherent in the CDSs. For more detailed discussion of various credit derivative products offered by major investment banks, see Deutsche Bank (2003) and Ranciere (2002).
Equity swaps are a subset of the total return swaps discussed are discussed below.
At the end of 1994, foreign exchange reserves of the Banco de Mexico were at 86.1 billion.
Other structured instruments were also used in the run-up to the Asian crisis. For example, one of the well-known instruments was called a PERL—principal exchange rate linked note, described in detail in Dodd (2001). A PERL was a dollar-denominated instrument that generated cash flows linked to a long position in an emerging market currency. If the exchange rate remained stable, the return on the PERL was significantly higher than the return on the similarly rated dollar paper, but in the event of major depreciation, the return could become negative.
The most recent (1999) ISDA guidelines include the following types of credit events: “failure to pay,” “obligation acceleration,” “obligation default,” “repudiation/moratorium,” and “restructuring.”
By comparison, as of November 2001, the value of the EMB Global Argentina subindex was around $51 billion.