Asia’s Stock Markets: Are There Crouching Tigers and Hidden Dragons?

Contributor Notes

Authors’ E-Mail Addresses: flipinsky@imf.org; long@imf.org.

Stock markets play a key role in corporate financing in Asia. However, despite their increasing importance in terms of size and cross-border investment activity, the region’s markets are reputed to be more “idiosyncratic” and less reliant on economic and corporate fundamentals in their pricing. Using a model that draws on international asset pricing and economic theory, as well as accounting literature, we find evidence of greater idiosyncratic influences in the pricing of Asia’s stock markets, compared to their G-7 counterparts, beyond the identified systematic factors and local fundamentals. We also show proof of a significant relationship between the strength of implementation of securities regulations and the “noise” in stock pricing, which suggests that improvements in the regulation of securities markets in Asia could enhance the role of stock markets as stable and reliable sources of financing into the future.

Abstract

Stock markets play a key role in corporate financing in Asia. However, despite their increasing importance in terms of size and cross-border investment activity, the region’s markets are reputed to be more “idiosyncratic” and less reliant on economic and corporate fundamentals in their pricing. Using a model that draws on international asset pricing and economic theory, as well as accounting literature, we find evidence of greater idiosyncratic influences in the pricing of Asia’s stock markets, compared to their G-7 counterparts, beyond the identified systematic factors and local fundamentals. We also show proof of a significant relationship between the strength of implementation of securities regulations and the “noise” in stock pricing, which suggests that improvements in the regulation of securities markets in Asia could enhance the role of stock markets as stable and reliable sources of financing into the future.

I. Introduction

The Chinese proverb, “Crouching tiger hidden dragon,” is an apt description of Asia’s stock markets today. It refers to the mysteries or undiscovered potential that lie beneath the surface—which appropriately captures the stage of development of the region’s stock markets. They have been and are a key source financing for local corporates but their potential is yet to be fully realized. They are an important destination for foreign investment but some markets are still perceived to be somewhat opaque and more idiosyncratic in nature.

The role of Asia’s stock markets as important drivers of growth in the region is underappreciated. Probably unknown to many, the share of stock market capitalization as a percentage of GDP in most Asian countries is comparable to their total banking sector assets, with debt securities markets coming a distant third (Figure 1). It contrasts with developments in many advanced countries, where the banking sector continues to dominate financial intermediation [see Financial Sector Structure: Recent Developments and Evolving Trends, forthcoming]. To illustrate the breadth and depth of Asia’s stock markets, statistics published by the World Federation of Exchanges show that:

  • Equity issuances have been an important source of financing in many countries in the Asian region. New capital raised by stock issuance in Asia in 2012 amounted to $198 billion, compared to $234 billion in the Americas and $102 billion in Europe, Middle-East and Africa (EMEA) combined.

  • With a capitalization of almost $15 trillion, Asia’s stock market capitalization is about equivalent in value to those of EMEA combined (Table 1).

  • Almost 20,000 companies are listed in Asia’s stock markets as at end-2012, just under the rest of the world combined—over 10,000 in the Americas and a total of 13,300 in EMEA.

  • Market liquidity in 2012, measured as the ratio of total turnover to average capitalization, was 0.9 for Asia, compared to 1.2 for the Americas and 0.65 for EMEA.

Figure 1.
Figure 1.

Asia-Pacific Ex-Japan, G-7 and the Rest of the World: Structure of the Financial Sector as at End-2012

(In percent of GDP)

Citation: IMF Working Papers 2014, 037; 10.5089/9781484320143.001.A001

Sources: Bank for International Settlements; Bloomberg; Haver Analytics; International Monetary Fund (IMF); and authors’ estimates.1/ The Hong Kong SAR column is truncated for presentation purposes, given the relatively large size of its financial system, with stock market capitalization amounting to almost 13 times GDP and outstanding debt securities issued domestically amounting to 54 percent of GDP as at end-2012.
Table 1.

Stock Markets around the World: Capitalization as at End-2012

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Source: World Federation of Exchanges.Notes:

Korea Exchange: includes Kosdaq market data.

NASDAQ OMX Nordic Exchange: OMX includes Copenhagen, Helsinki, Iceland, Stockholm, Tallinn, Riga and Vilnius Stock Exchanges.

Singapore Exchange: market capitalization includes domestic listings and a substantial number of foreign listings, defined as companies whose principal place of business is outside of Singapore. Inactive secondary foreign listings are excluded.

Total for Asia-Pacific excludes Osaka and National Stock Exchange of India to avoid double counting with Tokyo and Bombay SE respectively.

Asia’s stock markets have also become more integrated with the international financial system. Foreign investment in many of the region’s stock markets have grown since the Asian financial crisis (AFC) and exponentially so in some of the larger markets, resuming their expansion following the sharp retrenchment during the global financial crisis (GFC) (Figure 2). Meanwhile, cross-listings, including in the form of Depository Receipts, from within the region and elsewhere have also expanded as companies seek to tap the region’s liquidity (BNY Mellon, 2012; JPMorgan, 2012). The number of foreign listings in Asia’s stock markets has tripled over the past 10 years, albeit still low at around 2 percent of the total (compared to 10 percent each in the Americas and EMEA). In turn, emerging market firms, including those from Asia, have over the years sought to access more developed capital markets to benefit from lower cost of capital, higher valuations, enhanced investor recognition, better corporate governance, among other reasons.

Figure 2.
Figure 2.

Asia-Pacific Ex-Japan: Outstanding Foreign Investment in Equity Securities, 1997–2012

(In millions of U.S. dollars)

Citation: IMF Working Papers 2014, 037; 10.5089/9781484320143.001.A001

Sources: IMF; and authors’ estimates.Note: Broken lines denote interpolation of data.

Although Asia’s stock markets have been an important source of funding for the region, their full potential remains to be exploited (Ghosh and Revilla, 2007). One possible reason is the perception that the pricing of Asian stocks are more idiosyncratic in nature, notably:

  • Speculative activity rather than economic and corporate fundamentals are seen to be driving prices in some of these stock markets. Researchers and the financial press often ascribe sharp drops in Asia’s stock markets to the bursting of speculative bubbles,2 with some of the more recent literature on the topic providing support for this view.3 Anecdotal evidence suggests that such perceptions of the region’s stock markets has prevailed, despite analyses showing that such findings are not exclusive to Asia—evidence of speculative bubbles has also been found in stock prices of advanced economies.4

  • Other related research suggests that stock returns variation is larger in emerging markets, appears unrelated to co-movement of fundamentals and are therefore consistent with “noise trading.”5 In addition to macroeconomic conditions, the literature has also contemplated the importance institutional quality—such as political, legal, regulatory and governance considerations—for the development of Asia’s capital markets.6 The evidence also suggests that pricing efficiency in Asian stock markets depends on the level of development as well as the regulatory framework for transparent corporate governance.7

This paper analyzes the pricing of Asia’s stock markets to determine the validity of some of these long-held views. Our study draws on asset pricing and economic theory, as well as the empirical evidence from accounting literature. It examines the extent to which well-established systematic international factors and domestic fundamentals influence Asian stock markets vis-à-vis more “idiosyncratic” factors. Specifically, our model:

  • First incorporates: (i) international factors common to the universe of assets across national boundaries, such as global and regional risks; (ii) the domestic economic and financial fundamentals, such as the local business cycle and the financial performance of the corporate sector, to extract the “idiosyncratic” component in stock returns.

  • We subsequently test for the relationship between this idiosyncratic component and the strength of implementation of securities regulations to represent the role of institutional quality in the pricing of stocks.

Our findings corroborate the existing literature on stock market pricing. We find evidence of greater idiosyncratic influences in Asia-Pacific stock markets, compared to their G-7 counterparts, beyond the identified systematic international factors and local economic and financial fundamentals. The influence of these international and local factors appears to be time-varying, and is most significant during the current GFC, with regional developments having become the most important. Among local factors, forecast earnings appears to carry the most information for stock pricing, markedly so during the GFC period. These results suggest that investors may be seeking more guidance from fundamentals in their pricing decisions during this crisis, in both emerging and advanced country markets. Separately, asset allocation decisions by foreign investors also appear to affect stock market volatility and returns in both groups of countries.

We also find a direct and significant connection between market regulation and the importance of idiosyncratic factors. Countries which have been better at implementing internationally accepted principles of securities regulation tend to be less subject to idiosyncratic influences in the pricing of their stocks. Thus, improvements in the regulation of securities markets in Asia would likely strengthen investor confidence by ensuring that these markets are operated efficiently and fairly. In turn, this would enhance the role of local stock markets as attractive investment destinations and thus as reliable sources of financing [see Financial Sector Structure: Recent Developments and Evolving Trends, forthcoming]. That said, we acknowledge that some of the “noise” in stock returns may be attributable to other country-specific factors that are not captured in our model.

This paper is structured as follows. Section II discusses the construction of our asset pricing model and details the sources of data required for this exercise. The results and analysis are presented in Section III. Section IV considers the policy implications of our findings and Section V concludes.

II. Data and Stylized Facts

The countries in our sample comprise the main emerging and advanced economies in the Asia-Pacific (excluding Japan), benchmarked against the G-7 countries. The former consists of China, Hong Kong and Korea (in North-East Asia) and Indonesia, Malaysia, the Philippines, Singapore and Thailand (in South-East Asia), plus Australia and India. The weekly market and earnings data are sourced from Bloomberg and I/B/E/S via Datastream (Appendix I, Appendix Tables 1 and 2). Market capitalization statistics are available from Bloomberg and the World Federation of Exchanges (WFE), while annual data on foreign investment and periodic (confidential) information on regulatory implementation are sourced from the IMF.

Broadly speaking, diversified world and regional portfolios have not always been the most optimal investments, ex post. In other words, they have not been mean-variance efficient—i.e., at the asset allocation efficient frontier—relative to some individual stock markets (Figure 3 and Appendix II, Appendix Table 3).

Figure 3.
Figure 3.
Figure 3.
Figure 3.
Figure 3.

Stock Markets around the World: Mean-Variance Analysis of Country, Regional and World Returns, March 1998 – November 2012

(Weekly U.S. dollar returns, in percent)

Citation: IMF Working Papers 2014, 037; 10.5089/9781484320143.001.A001

Sources: Bloomberg; and authors’ calculations.
  • Asia’s stock markets have generally yielded better returns over time relative to their G-7 counterparts, but have tended to be more volatile.

  • Asia’s markets underperformed the G-7 during the AFC, in terms of the average risk-return tradeoff. Excluding the GFC, they recorded their highest volatility and lowest returns during this period.

  • The “peacetime” period immediately before the GFC was the most rewarding for investors. Markets posted their highest returns and were among the least volatile.

  • All regions recorded their worst performance during the GFC. Across the board, stock markets posted negative returns (except for India, Malaysia, Philippines and Thailand) and many experienced their greatest volatility.

The empirical evidence indicates that:

  • Stock markets have become more integrated. As a simple proxy, return correlations between individual and regional stock markets and between individual and world stock markets have trended upwards over the past decade-and-a-half. These correlations tend to be lower for the emerging Asia-Pacific markets compared to the advanced economies in the region and the G-7 countries (Appendix II).

  • Foreign investors play a role in influencing stock market volatility and returns (Appendix III).

    • While there is little relationship between the share of foreign holdings in a country’s stock markets and the volatility of returns, their asset allocation decisions matter. An examination of the relationship between foreign investment in equities as a proportion of average stock market capitalization and the volatility of weekly stock market returns for both the G-7 and Asia-Pacific countries over the 2001–12 period shows no significant relationship between the two. However, pullout by foreign investors, especially during the GFC period, tends to exacerbate market volatility.

    • Asset allocation decisions by foreign investors have a clear impact on stock market returns. On average, stock market returns tend to be higher in markets with a higher share of foreign holdings, albeit less obviously so among the G-7 markets. For both groups of countries, stock market returns exhibit a strong positive relationship with net foreign portfolio flows.

III. Method

The existing literature suggests that the stock market returns of a country are dependent on local and international factors. We apply Ross’ (1976) arbitrage pricing theory (APT) in our modeling of individual stock market returns in the form of a factor model in the following generalized form (see Appendix IV for a detailed exposition on the model design):

(1)Rc,t=bc,0+bc,1,BCc,t+bc,2EPSc,tf+bc,3EPSc,ta+bc,4Rw,t+bc,5Rr+ec,

where:

Rc,t represents the stock market return for country c at time t;

BCc,t represents the business cycle for country c at time t;

EPSc,tf is the one-year ahead forecast corporate sector EPS for country c at time t;

EPSc,ta is the actual (realized) corporate sector EPS for country c at time t;

Rw,t is the world stock index return at time t;

Rr,t is the regional stock index return at time t;

ec is the idiosyncratic error term; and all the variables are expressed in local currency terms.

In an efficient market, stock prices respond very quickly to incorporate all relevant publicly available information in their pricing (Fama, 1970). Thus, Rc should reflect the information contained in the right-hand-side variables, with ec representing relevant pricing information that is not captured in the model. Unfortunately, the inclusion of other emerging market regions for comparison purposes is not possible owing to the lack of availability of requisite market data.

IV. Analysis

A. The Pricing of Stocks

We run preliminary regressions to determine the most parsimonious form for the relationship between stock market returns and the explanatory variables. First, we apply equation (1) to Dataset 1, which comprises all independent variables for all countries over the July 2005 – November 2012 period. The results show that the systemic regional factor is the most important explanatory variable. Forecast EPS is significant for more countries during the GFC. However, two of the local factors—the business cycle and realized EPS—are largely not significant in explaining stock market returns (Appendix V, Appendix Table 4). The general lack of explanatory power of these variables could mean that much of the related information content may already be captured by the forecast EPS variable. We also confirm that the individual stock market returns are generally not autocorrelated and are stationary, according to our respective Durbin-Watson and unit root tests; the regression residuals are homoskedastic, according to the White’s test results.

Next, we apply equation (1) to Dataset 2, which comprises all independent variables for a subset of countries over the March 1998 – November 2012 period. The results show that the systemic regional factor remains the most important factor through the extended period (Appendix V, Appendix Table 5). Similar to the GFC period, forecast EPS is significant for more countries during the AFC, suggesting that investors may look for more market guidance during stressed periods.

Based on these findings, we reduce the form of equation (1) by omitting two of the largely insignificant local factors. In doing so, we are able to include all countries over the full March 1998 – November 2012 period. In this version of the model, the stock market return of a country, c, is generated by a factor model comprising one local factor (forecast EPS) and the two international (world and regional) ones. This relationship is represented as follows:

(2)rc,t=bc,o+bc,1EPSc,tf+bc,2Rw,t+bc,3Rr,t+ec,

where:

EPSc,tf is the one-year ahead forecast corporate sector EPS for country c at time t;

Rw,t and Rr,t are the world and regional stock index returns, respectively, at time t;

ec is the idiosyncratic error term; and all the variables are expressed in local currency terms.

The application of equation (2) allows us to use Dataset 3, which covers the full March 1998 – November 2012 period. Our results suggest that while the pricing of Asian stock markets may be more idiosyncratic, the general trends over time are similar to those seen in their G-7 counterparts (Table 2):

  • The findings corroborate the existing literature which shows that stock market returns in emerging markets are less related to fundamentals and more influenced by idiosyncratic factors. On average, the adjusted-R2 for Asia’s stock markets is much lower than for the G-7 countries, while the average SE for Asia is larger by several multiples, compared to the G-7 countries. Correspondingly, the more developed stock markets in the region (Australia, Hong Kong, Korea and Singapore) typically show higher adjusted-R2 than their regional peers, and more in line with the G-7 markets.

  • In general, the influence of international factors on Asia’s stock markets has become more significant over time, underscoring the increasing integration across borders. The systematic regional factors have been relatively more dominant than the world factor at any point in time, supporting the empirical evidence of greater intra-regional activity; the importance of regional factors has also increased over time. This feature is consistent with that seen in the G-7 markets for some time, where regional factors have consistently represented the main pricing influence for stock markets. Within Asia, China’s stock markets stand out in terms of their growing openness to international influences—all four markets were largely unaffected by world events up until the GFC, but have become significantly so since its onset.

  • Local developments have been relatively less important in the pricing of Asia’s stock markets. Any information conveyed by changes in anticipated corporate earnings appears to have had little influence on stock prices in general, both during the AFC and “peacetime” periods. This is consistent with the empirical literature which shows evidence of greater pricing inefficiency during the AFC owing to the chaotic financial environment (Lim and others, 2008). However, this trend changed during the GFC, with the information imparted by forecast earnings becoming significant for many more markets. The implication is that investors may be relying more on expert forecasts for guidance during volatile times. The trend is similar for the G-7 stock markets.

  • There are few similarities in the pricing of stock markets between the AFC and GFC periods, except for the common lack of “pricing errors” (possible abnormal returns). Pricing errors reflect, in part, returns that are not accounted for by systematic factors, fundamentals or idiosyncratic influences and are captured in the intercept term in equation (2). They have been significantly different from zero for several Asian markets during “peacetime,” notably for China and India, suggesting that abnormal returns may not have been arbitraged away in the relatively more insulated markets.

Table 2.

Regression Results: Stock Market Returns, Systematic Factors and Corporate Sector Performance, March 1998 – November 2012

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Sources: Bloomberg; I/B/E/S via Datastream; and authors’ calculations.

B. The Role of Regulation

The existing empirical evidence points to the importance institutional factors in the pricing of stocks. In this context, Hsieh and Nieh (2010) argues that there remains room for greater improvement in Asian countries, in areas such as regulation, corporate governance, products and market infrastructure before greater international financial integration is possible towards realizing potential benefits of scale, capacity and liquidity.

We first test for the relationship between the overall strength of regulation and the extent of idiosyncratic influences on stock pricing. We use the International Organization of Securities Commissions’ (IOSCO) Objectives and Principles of Securities Regulation (IOSCO, 2003) assessments, conducted during the IMF’s Financial Sector Assessment Program (FSAP) missions to the countries in our sample, as a proxy for the strength of securities regulation. Given the infrequency of IOSCO assessments across countries, we regress the standard error of regression from the results of equation (2) on individual countries’ average IOSCO ratings (see Box 1) from the corresponding period, between 2000–2012:

(3)Se,c,t=ac,o+ac,1IOSCOc,t,

where:

se,c,t is the standard error of regression for country c at time t; and

IOSCOc,t is the average IOSCO rating for country c at time t.

The regression results point to a significant relationship between idiosyncratic influences in stock pricing and the implementation of securities regulations in individual countries (Figure 4). The coefficient for the IOSCO explanatory variable is significantly different from zero at the 1 percent level. Our findings imply that countries with better implementation of securities regulations are associated with stock markets that are less subject to idiosyncratic influences. This suggests that some of the “noise” associated with the regression results for the emerging Asian markets may be attributable to institutional factors, consistent with previous evidence.

Figure 4.
Figure 4.

Regression Results: Idiosyncratic Influences on Stock Markets and the Effectiveness of Securities Regulation, March 1998 – November 2012

Citation: IMF Working Papers 2014, 037; 10.5089/9781484320143.001.A001

Sources: Bloomberg; I/B/E/S via Datastream; IMF; and authors’ calculations.

The empirical evidence also shows that the quality of regulation affects risk perceptions and consequently the cost of financing over the longer term. We group the stock market performance of the Asia-Pacific ex-Japan and G-7 countries in our sample that have undergone FSAPS into four roughly equal-sized buckets: Group 1 comprises the countries with the strongest record of implementation of securities regulations (i.e., those with highest average IOSCO ratings) up to Group 4, which consists of those with the weakest practices in regulating securities markets. Unsurprisingly, our findings confirm that weak regulation tend to be associated more volatile markets and higher required equity cost of capital, as represented by the actual return (Figure 5). As a group, the Asia-Pacific ex-Japan stock markets tend to have higher IOSCO ratings (i.e., weaker implementation of regulations) relative to their G-7 peers.

Figure 5.
Figure 5.

Asia-Pacific Ex-Japan and the G-7 Countries: Securities Regulation and the Risk-Return Trade-off, March 1998 – November 2012

Citation: IMF Working Papers 2014, 037; 10.5089/9781484320143.001.A001

Sources: Bloomberg; I/B/E/S via Datastream; IMF; and authors’ calculations.

A closer examination of the nine IOSCO assessments for the Asia-Pacific ex-Japan countries over the 2001–11 period shows that much remain to be done in terms of strengthening securities regulation and their implementation. The IOSCO principles under the 2003 methodology are grouped into eight categories, specifically, principles: relating to the regulator; for self-regulation; for the enforcement of securities regulation, for cooperation in regulation, for issuers, for collective investment schemes, for market intervention; and for the secondary market. While “good practice” securities regulations, as defined under the 2003 IOSCO methodology, had been implemented or broadly implemented in many countries, a wide range had also been assessed as being either partially implemented or not implemented depending on the country (Figure 6). The assessments reveal that most countries typically require improvements in a few areas, with the biggest weaknesses evident in the areas of operational independence and accountability (Principle 2) and the effective and credible use of powers and implementation of an effective compliance program (Principle 10).

Figure 6.
Figure 6.

Asia-Pacific Ex-Japan Countries: Distribution of IOSCO Ratings, 2001–111/

Citation: IMF Working Papers 2014, 037; 10.5089/9781484320143.001.A001

Source: IMF.1/ Nine assessments applying the 2003 IOSCO methodology were undertaken during this period.

Deriving a Measure of Effective Securities Regulation

IOSCO is the leading international grouping of securities market regulators with a membership comprising regulatory bodies from over 100 jurisdictions that have day-to-day responsibility for securities regulation and administration of securities laws. The IOSCO Objectives and Principles of Securities Regulation (“Principles”) set out a broad general framework for the regulation of securities Their core aims are to protect investors, ensure that markets are fair, efficient and transparent, and reduce systemic risk.

including the regulation of:

  1. securities markets;

  2. the intermediaries that operate in those markets;

  3. the issuers of securities;

  4. the entities offering investors analytical or evaluative services such as credit rating agencies; and

  5. the sale of interests in, and the management and operation of, collective investment schemes.

The Methodology for assessing implementation of the IOSCO Principles is designed to provide IOSCO’s interpretation and to give guidance on the conduct of a self- or third-party assessment of the level of Principles implementation. Two methodologies have been used to date—the first was introduced in 2003 and subsequently replaced by the new one in 2011. The FSAP detailed assessments of implementation of individual IOSCO Principles assigns ratings, with these Principles adjudged by independent experts to be either “Implemented,” “Broadly Implemented,” “Partially Implemented” or “Not Implemented.” The rating scale was changed in May 2002, when the “Broadly Implemented” category was added. For this particular analysis, we assign a number to each rating, as follows:

Implemented = 1

Broadly Implemented = 2

Partially Implemented = 3

Not Implemented = 4

For each country, the corresponding numerical rating for each IOSCO principle in a particular assessment is aggregated and then averaged to arrive at the rating that is used in regression (3).

V. Conclusion

In Asia, local stock markets play a key role in financing corporate, and thus economic, activity. Unfortunately some of Asia’s stock markets have the reputation of being more speculative in nature, rather than trading on fundamentals. Going forward, investors must be able to be able to credibly price their investment in the region’s stock markets if their asset allocation is to remain stable or to continue to grow.

Our study assesses the extent to which Asia’s stock pricing is based on idiosyncratic factors, rather than on systematic risk factors or economic and corporate fundamentals. We design a model using international asset pricing and economic theory, incorporating also evidence from accounting literature. International factors common to the universe of assets such as global and regional market risks, the local business cycle and the financial performance of the corporate sector, are applied to extract the “noise” component in stock prices. The G-7 countries are used as benchmarks.

Overall, our findings are consistent with the existing literature on the pricing of Asian stock markets. In general, the region’s stock returns have tended to be higher than those of their G-7 counterparts but have also been more volatile. International systemic risk factors and local fundamentals, such as expected corporate earnings, have substantially less explanatory power when it comes to Asian stock prices compared to the G-7 markets. The results point to the existence of greater idiosyncratic influences in the region.

In other aspects, there are greater commonalities between the emerging and advanced country markets. Regional factors are consistently the most influential pricing variable, which corroborates the research on international market integration. Local developments, such as forecast earnings, had been relatively less useful as an explanatory variable but have become more important—for both Asian and G-7 markets during the current GFC—possibly because investors seek more expert guidance during volatile periods. Foreign investor allocation decisions also significantly influence the volatility and returns in both the Asia-Pacific and G-7 markets.

We demonstrate the role that policy could play in ensuring that “noise” is reduced in stock pricing. While we acknowledge that the apparent importance of idiosyncratic influences on Asian markets could also be attributable to specific local fundamental factors that our model may not have adequately captured, our empirical analysis suggests the existence of a significant relationship between the strength of regulation of securities markets and the extent of noise trading in stock markets. This suggests that improvements in local institutions, such as the regulation of securities markets, could enhance the role of Asian stock markets as an attractive investment destination and thus as a reliable source of funding for corporate and economic activity in the region.

Appendix I. Dataset and Sample Periods

Sample periods are determined in part by data availability (Appendix Table 1). The full period under examination is March 1998 to November 2012. Subsets of countries and variables are applied as available (Appendix Table 2). They comprise:

  • Dataset 1 consisting of all independent variables for the full set of countries

    • July 2005 – December 2007 (“peacetime”).

    • January 2008 – November 2012 (GFC).

  • Dataset 2 consisting of all independent variables for a subset of countries (Canada, Germany, United Kingdom, United States, Australia, Hong Kong)

    • March 1998 – December 2000 (AFC). Although the AFC began with the devaluation of the Thai baht in July 1997, the data for all variables are only available for some countries from March 1998.

    • January 2001 – December 2007 (“peacetime”), broken down into

      • January 2001 – June 2005 (following the bursting of the technology bubble in 2000 and including the September 11, 2001 terrorist attack), and

      • July 2005 to December 2007 (the boom period leading up to the GFC).

    • January 2008 – November 2012 (GFC).

  • Dataset 3 consisting of a subset of independent variables (world returns, regional returns, forecast EPS) for the full set of countries

    • March 1998 – December 2000 (AFC).

    • January 2001 – December 2007 (“peacetime”), broken down into

      • January 2001 – June 2005, and

      • July 2005 to December 2007.

    • January 2008 – November 2012 (GFC).

  • Relevant exchange rates for each country for the full sample period to calculate the necessary conversions to local currencies.

Appendix Table 1.

Asia-Pacific Ex-Japan and the G-7 Countries: Market Data Series and Sources

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Sources: Bloomberg; and I/B/E/S via Datastream.

Benchmark switched to MIB-30 in September 2004.

Benchmark switched to S&P/ASX 200 in April 2000.

Benchmark switched to Straits Times Index in January 2008.