Question

Which equity markets are more liquid, developed or emerging markets?

Which equity markets are more concentrated, developed or emerging markets?

What is cross-listing? Give an example of cross-listing. Explain three reasons for cross-listing.

What is ADR? Are ADRs of Toyota company denominated in US dollars or in Japanese Yen?

Are ADRs traded on US stock exchange or Japanese exchange?

Are dividends paid in US dollars or Yen?

Total risk of a security’s return could be decomposed into which two risk?

Why might systematic risk within a nation be nonsystematic and diversifiable outside the country?

Do emerging markets have higher or lower risk and return than developed markets? Which country has the highest equity return correlation with US?

Which has the lowest correlation with US?

What is the implication on international portfolio diversification?

What is home asset bias?

Give four possible reasons to explain home bias. Suppose you are considering making a large amount of equity investment, what motives you to buy domestic stocks, foreign stocks, or a combination of both?

Answer 1

Developed markets are more liquid than the emerging markets because  developed nations have more advanced economies, better-developed infrastructure, more mature capital markets, and higher standards of living.Emerging markets, on the other hand, are in the process of rapid growth and development but they have lower household incomes and capital markets that are less mature than developed countries.

Now a days emerging equity markets are more concentrated because emerging markets are striving to become more industrialized quickly, they often have higher growth per year than the most developed countries like the U.S. or U.K. emerging markets often have a higher rate of growth compared to developed countries, they are often plagued by higher sociopolitical instability and volatility.

Cross-listing is the listing of a company's common shares on a different exchange than its primary and original stock exchange. for example: Let's assume Company XYZ is a Canadian public company that lists its shares on the Toronto Stock Exchange. Company XYZ could issue more shares and list them on the New York Stock Exchange (NYSE). Then, people in both the United States and Canada can buy and sell Company XYZ stock. By cross-listing, however, Company XYZ must comply with all of the legal and exchange requirements that apply to companies doing business in the United States.

reasons for cross listing

1. Market segmentation: The traditional argument for why firms seek a cross-listing is that they expect to benefit from a lower cost of capital that arises because their shares become more accessible to global investors whose access would otherwise be restricted because of international investment barriers.

2.Market liquidity: Cross-listings on deeper and more liquid equity markets could lead to an increase in the liquidity of the stock and a decrease in the cost of capital.

3.investor protection ("bonding"): Recently, there is a growing academic literature on the so-called "bonding" argument. According to this view, cross-listing in the United States acts as a bonding mechanism used by firms that are incorporated in a jurisdiction with poor investor protection and enforcement systems to commit themselves voluntarily to higher standards of corporate governance. In this way, firms attract investors who would otherwise be reluctant to invest.

American Depository Receipt (ADR) is a certified negotiable instrument issued by an American bank suggesting the number of shares of a foreign company that can be traded in U.S. financial markets. ADRs of Toyota company denominated in Japanese Yen. An American depositary receipt is a negotiable security that represents securities of a company that trades in the U.S. financial markets. Shares of many non-U.S. companies trade on U.S. stock exchanges through ADRs.Dividends paid in yen.

Total risk can be decomposed into systematic risk and unsystematic risk.

First, you can't expect stock markets to keep going up in a straight line. All markets entail risk, and one way to counter that risk is through diversification.second,international investing can reduce the risk associated with the investor's consumption stream by matching foreign currency inflows with foreign currency outflows.

Emerging markets may have higher returns (at higher risk)This is because, in contrast to developed markets such as the US, Europe, and Japan, which have large and stable economies, emerging market countries are usually growing quickly to “catch up” to the developed world.

Australia is the largest stock market and therefore it has a much higher correlation to the general EAFE index.brazil is the country with lowest correlation.

International portfolio diversification is an investment strategy which allows an investor to reduce portfolio risk by holding domestic and foreign financial assets simultaneously.

Home bias is the tendency for investors to invest the majority of their portfolio in domestic equities, ignoring the benefits of diversifying into foreign equities.

Many explanations of home asset bias involve intuitions that should affect the data inputs used by investors in optimizing portfolios: (1) transaction costs affecting expected returns, (2) perceived riskiness of foreign assets affecting standard deviations, and (3) omitted assets affecting correlations

Motives to buy domestic stocks, foreign stocks, or a combination of both,

1.high national economic growth rates
2.exchange rate stability
3.general macroeconomic stability
4.levels of foreign exchange reserves held by the central bank
5.general health of the foreign banking system
6.liquidity of the stock and bond market
7.interest rates   

8.the ease of repatriating dividends and capital
9.taxes on capital gains
10.regulation of the stock and bond markets
11.the quality of domestic accounting and disclosure systems
12.the speed and reliability of dispute settlement systems
the degree of protection of investor’s rights