DOCSLIB.ORG

Analysis of the Relation Between Market Capitalization and Stock Market Indices at The

Total Page：16

File Type：pdf, Size：1020Kb

Download full-text PDF Read full-text
Analysis of the Relation Between Market Capitalization and Stock Market Indices at The ANALYSIS OF THE RELATION BETWEEN MARKET CAPITALIZATION AND STOCK MARKET INDICES AT THE NSE BY Kamunde Lawrence Kaburu A RESEARCH PROJECT PRESENTED IN PARTIAL FULFILLMENT OF THE REQUIREMENT FOR THE AWARD OF THE DEGREE OF MASTER OF BUSINESS ADMINISTRATION, SCHOOL OF BUSINESS, UNIVERSITY OF NAIROBI OCTOBER 2012 DECLARATION I declare that this is my original work and has not been presented for award of any degree in any university. Signed: ………………………… Date: ……………………… Lawrence Kaburu D61/73548/2009 This proposal has been submitted for examination with my approval as the University Supervisor. Signed: ………………………… Date: ………………………. Mr. Peter Opande Lecturer, Department of Business Administration School of Business University of Nairobi ii DEDICATION I dedicate this project to my parents Alfred Kamundi and Silveria Mwaria for their care, support and moral upbringing. To my fiancée Purity for her care, understanding, concern and enthusiasm that inspired me to achieve this goal. God Bless you all abundantly. iii ACKNOWLEDGEMENTS This study would not have been possible without the support and assistance of a number of people. First, I give thanks to the Almighty God for giving me the strength and knowledge to carry out the study. Special thanks go to my Supervisor, Mr. Peter Opande, who provided critical assistance and critique to me during the entire project period. Indeed his insights and diligent support helped in shaping the study. Special thanks go to my family for their support, encouragement and love during the research project writing process. I equally place on record my study colleagues particularly Dennis, Mbithi, Noel and Jesse whose valuable contribution enabled me to sail through the course. iv TABLE OF CONTENTS DECLARATION .......................................................................................................... ii DEDICATION ............................................................................................................. iii ACKNOWLEDGEMENTS .......................................................................................... iv LIST OF TABLES .......................................................................................................vii ABBREVIATIONS .................................................................................................... viii ABSTRACT .................................................................................................................. ix CHAPTER ONE: INTRODUCTION ........................................................................... 1 1.1 Background of the study....................................................................................1 1.2 Problem Statement ............................................................................................6 1.3 Objectives .........................................................................................................7 1.4 Value of the Study.............................................................................................8 CHAPTER TWO: LITERATURE REVIEW ............................................................ 10 2.1 Introduction .................................................................................................... 10 2.1.1 Utilization/ Functions of stock indices ........................................................ 10 2.3 Stock Market Index Theories........................................................................... 12 2.3 Factors influencing share prices in the stock markets ....................................... 16 2.4 Indicators of stock market performance ........................................................... 17 2.5 Types of stock market indices ......................................................................... 18 2.6 Methods of computing stock market indices .................................................... 20 2.7 Nairobi Stock Exchange Indices ...................................................................... 21 v 2.9 Problems with stock market indices ................................................................ 23 2.10 Empirical Review ......................................................................................... 25 2.11 Overview on Literature Review ..................................................................... 29 CHAPTER THREE: RESEARCH METHODOLOGY ............................................ 31 3.1 Introduction .................................................................................................... 31 3.2 Research Design.............................................................................................. 31 3.3 Population and Sample .................................................................................... 31 3.4 Data Sources and Collection............................................................................ 31 CHAPTER FOUR: DATA ANALYSIS AND INTERPRETATION OF RESULTS 33 4.1 Introduction .................................................................................................... 33 4.2 Correlation Test .............................................................................................. 33 4.3 Unit Root Tests ............................................................................................... 34 4.4 Regression results ........................................................................................... 36 CHAPTER FIVE: SUMMARY, CONCLUSION AND RECOMMENDATIONS 38 5.1 Summary and Conclusions .............................................................................. 38 5.2 Recommendation ............................................................................................ 39 5.3 Limitations of the Study .................................................................................. 39 5.4 Areas of Further Research ............................................................................... 40 REFERENCES ............................................................................................................ 41 APPENDICES ............................................................................................................. 45 Appendix 1: Market Capitalization, NSE 20 Share index and NASI Data .............. 45 vi LIST OF TABLES Table 4.1: Correlation matrix ……………………………………….…………………33 Table 4.2: Unit root tests at levels………... ………………………………………….. 35 Table 4.3: Unit root test at second difference…………………………………………36 Table 4.4: Regression results for the variables under study……………….…………..36 vii ABBREVIATIONS ADF Augmented Dicky Fuller ASE Athens Stock Exchange CAPM Capital Asset Pricing Model CI Co-integration CMA Capital Market Authority DAX Deutscher Aktien Index DJIA Dow Jones Industrial Average EG Engle & Granger EGARCH Exponential Autoregressive Conditional Heteroskedascity GDP Gross Domestic Product IFC International Finance Corporation MCAP Market Capitalization ML Maximum Likelihood MVA Market Value Added NASI NSE All Share Index NSE Nairobi Securities Exchange OLS Ordinary Least Square S&P Standard and Poor TOR Turnover Ratio UK United Kingdom USA United States of America viii ABSTRACT The objective of this study was to analyze the relation between market capitalization and stock market indices at Nairobi Stock Exchange (NSE). The various functions fulfilled by market indices make it important to assess their suitability as indicators of market performance alongside the market capitalization.The Nairobi Stock Exchange was used as the case study. The study employed time series analysis where E-views software was used to analyze the data to assess the relation among the variables. The study established that there exists a strong positive relationship between market capitalization and the NSE indices. However, the NSE-20-share index was found to be more significant in explaining most of the changes in the market capitalization than the NASI. This was mainly due to the nature and composition of the indices. Within that period of study, it was determined there was a very strong positive correlation between market capitalization and NASI and a rather moderate positive relationship between market capitalization and NSE 20 share index. ix CHAPTER ONE: INTRODUCTION 1.1 Background of the study Stock markets have existed for a number of centuries and have historically played a significant role in economic development by facilitating mobilization of long term capital (Ngugi, 2003). They do so by providing liquidity to various market players. Stock markets also provide investors with a platform for investing in various financial instruments (both underlying assets and derivatives). Key drivers in these markets are the returns and capital gains from respective securities. As a result, accurate measurement of the stock market performance is critical to information users as it helps to understand the demand, liquidity and return levels as well as the ease with which investors can mobilize capital. 1.1.1 The Concept of Market Capitalization and Stock Market Index Olson (2005) defines market capitalization as the price of a stock at any given time multiplied by the amount of shares outstanding. From a market perspective, market capitalization comprises the sum of individual outstanding shares by their prices for all the companies listed in a given stock market. According to Olson market capitalization can be classified as follows; one, large –cap ranging from $10 – 100 billion; mid-cap ($ 1 – 10 billion); Small-cap ($100 million – 1 billion) and micro-cap ($10 - $ 100 million). Olson notes that there
Load more

Recommended publications
  • ELECTRONIC, ELECTRICAL & SYSTEMS ENGINEERING Beng Final Year Project (EE3P) Ahmed Zaidi 1153609 Forecasting Weekly WTI Crude
    ELECTRONIC, ELECTRICAL & SYSTEMS ENGINEERING BEng Final Year Project (EE3P) Ahmed Zaidi 1153609 Forecasting Weekly WTI Crude Oil using Twitter Sentiment of US Foreign Policy and Oil Companies Dr. Mourad Oussalah Abstract The drop in crude oil price during late 2014 has had a significant impact on all nations. While some countries have reaped the benefits of low oil prices, others have suffered greatly. As a result, it is no surprise that many academics have attempted to develop reliable models to forecast crude oil price. In the age of information and social media, the role of Twitter and Facebook has become increasingly more relevant in understanding our environment. Many academics have exploited this wealth of data to extract features including sentiment and word frequency to build reliable forecasting models for financial instruments such as stocks. These methodologies, however, remain unexplored for the prediction of crude oil prices. The purpose of this investigation to develop a novel model that uses sentiment of United States foreign policy and oil companies’ to forecast the direction of weekly WTI crude oil prices. The investigation is divided into three parts: 1) a methodology of collecting tweets relevant to US foreign policy and oil companies’; 2) a statistical analysis of the novel features using Granger Causality Test; 3) the development and evaluation of three machine learning classifiers including Naïve Bayes, ANNs, and SVM to predict the direction of weekly WTI crude oil. The findings of the statistical analysis showed strong correlation between the novel inputs and WTI crude oil price. The results of the statistical tests were then used in the development of the predictive model.
    [Show full text]
  • Background Paper on the Market Structure for Thinly Traded Securities
    Division of Trading and Markets: Background Paper on the Market Structure for Thinly Traded Securities I. Introduction The staff in the Division of Trading and Markets of the Securities and Exchange Commission is issuing this background paper1 in relation to the Commission Statement on Market Structure Innovation for Thinly Traded Securities to provide information regarding the trading challenges and characteristics of those national market system (“NMS”) stocks that trade in lower volume (“thinly traded securities”).2 We summarize a variety of materials regarding secondary market trading of thinly traded securities, including a 2018 market analysis by the Division of Trading and Markets’ Office of Analytics and Research (“OAR”) and the U.S. Department of the Treasury’s 2017 report on the regulation of the U.S. capital markets (“Capital Markets Report”).3 In addition, we discuss the Commission staff Roundtable on Market Structure for Thinly-Traded Securities (“Roundtable”),4 where the dialogue among market participants and the comments submitted centered on the unique trading characteristics of thinly traded securities. Finally, we discuss the current regulatory framework for thinly traded securities. II. Trading Characteristics of Secondary Market Trading for Thinly Traded Securities A. SEC Staff Study The data in a recent study prepared by OAR5 indicated that approximately one-half of all NMS stocks have an average daily trading volume (“ADV”) of less than 100,000 shares and constitute less than two percent of all daily share volume. 1 This background paper represents the views of staff of the Division of Trading and Markets. It is not a rule, regulation, or statement of the Commission.
    [Show full text]
  • Market Cap: In-Depth Guide of Stock Market Capitalization Analysis
    Market Cap: In-Depth Guide of Stock Market Capitalization Analysis What Does Market Cap Mean? “Market capitalization refers to the total dollar market value of a company’s outstanding shares. Commonly referred to as ‘market cap,’ it is calculated by multiplying a company’s shares outstanding by the current market price of one share. The investment community uses this figure to determine a company’s size, as opposed to using sales or total asset figures.” What is a Stock’s Market Value? An important aspect of determining a stock’s worth is looking at its market value. The market value ​ is the price that an asset would command. ​ Figuring out the general market value of stocks and some other financial instruments like futures is pretty simple, since the market rates are extremely easy to find. A company’s true market value requires more than just the market cap. For the most accurate snapshot, you need to consider things like the P/E Ratio (Price to Earnings Ratio), the return on equity, ​ ​ and the EPS (Earnings Per Share) of the company in question. ​ ​ Market Cap vs. Market Value Both market cap and market value can be used to review the value of a company. They sound similar, and sometimes people use the terms interchangeably. The market cap is a metric that is based on the stock price. To determine a company’s market cap, all you have to do is multiply the current share price by the number of shares outstanding. With that in mind, it’s kind of understandable why the term market value is used interchangeably with market cap.
    [Show full text]
  • The Role of Stockbrokers
    The Role of Stockbrokers • Stockbrokers • Act as intermediaries between buyers and sellers of securities • Typically paid by commissions • Must be licensed by SEC and securities exchanges where they place orders • Client places order, stockbroker sends order to brokerage firms, who executes order on the exchanges where firm owns seats Types of Brokerage Firms • Full-Service Broker • Offers broad range of services and products • Provides research and investment advice • Examples: Merrill Lynch, A.G. Edwards • Premium Discount Broker • Low commissions • Limited research or investment advice • Examples: Charles Schwab Types of Brokerage Firms (cont’d) • Basic Discount Brokers • Main focus is executing trades electronically online • No research or investment advice • Commissions are at deep-discount Selecting a Stockbroker • Find someone who understands your investment goals • Consider the investing style and goals of your stockbroker • Be prepared to pay higher fees for advice and help from full-service brokers • Ask for referrals from friends or business associates • Beware of churning: increasing commissions by causing excessive trading of clients’ accounts Table 3.5 Major Full-Service, Premium Discount, and Basic Discount Brokers Types of Brokerage Accounts • Custodial Account: brokerage account for a minor that requires parent or guardian to handle transactions • Cash Account: brokerage account that can only make cash transactions • Margin Account: brokerage account in which the brokerage firms extends borrowing privileges • Wrap Account:
    [Show full text]
  • Frequently Asked Questions About Initial Public Offerings
    FREQUENTLY ASKED QUESTIONS ABOUT INITIAL PUBLIC OFFERINGS Initial public offerings (“IPOs”) are complex, time-consuming and implicate many different areas of the law and market practices. The following FAQs address important issues but are not likely to answer all of your questions. • Public companies have greater visibility. The media understanding IPOS has greater economic incentive to cover a public company than a private company because of the number of investors seeking information about their What is an IPO? investment. An “IPO” is the initial public offering by a company • Going public allows a company’s employees to of its securities, most often its common stock. In the share in its growth and success through stock united States, these offerings are generally registered options and other equity-based compensation under the Securities Act of 1933, as amended (the structures that benefit from a more liquid stock with “Securities Act”), and the shares are often but not an independently determined fair market value. A always listed on a national securities exchange such public company may also use its equity to attract as the new York Stock exchange (the “nYSe”), the and retain management and key personnel. nYSe American LLC or one of the nasdaq markets (“nasdaq” and, collectively, the “exchanges”). The What are disadvantages of going public? process of “going public” is complex and expensive. • The IPO process is expensive. The legal, accounting upon the completion of an IPO, a company becomes and printing costs are significant and these costs a “public company,” subject to all of the regulations will have to be paid regardless of whether an IPO is applicable to public companies, including those of successful.
    [Show full text]
  • Capital Formation Market Trends: Ipos and Follow-On Offerings
    Professional Perspective Capital Formation Market Trends: IPOs and Follow-On Offerings Anna Pinedo and Carlos Juarez, Mayer Brown LLP Reproduced with permission. Published February 2020. Copyright © 2020 The Bureau of National Affairs, Inc. 800.372.1033. For further use, please visit: http://bna.com/copyright-permission-request/ Capital Formation Market Trends: IPOs and Follow-On Offerings Contributed by Anna Pinedo and Carlos Juarez, Mayer Brown LLP The capital formation environment has significantly changed in the last two decades and, in particular, following the global financial crisis of 2008. The number of initial public offerings has declined, and M&A exits have become a more attractive option for many promising companies. This article reviews trends in the initial public offering market, notable alternatives to IPOs, and follow-on offering activity. A Changing Environment While completing an IPO used to be seen as a principal objective of and signifier of success for entrepreneurs—and the venture capital and other institutional investors who financed emerging companies—this is no longer the case. Market structure and regulatory developments have changed capital-raising dynamics following the dot-com bust and financial crisis. At the same time, private capital alternatives also have become more varied and more significant. The number of IPOs drastically declined after 2000 compared to prior historic levels. After a brief increase in the number of IPOs following the aftermath of the dotcom bust, the number of IPOs declined again, partly as a result of the financial crisis. Changes in the regulation of research, enhanced corporate governance requirements, decimalization, a decline in the liquidity of small and mid-cap stocks, and other developments have been identified as contributing to the decline in the number of IPOs.
    [Show full text]
  • New York Stock Exchange LLC; Notice of Filing
    SECURITIES AND EXCHANGE COMMISSION (Release No. 34-88441; File No. SR-NYSE-2020-21) March 20, 2020 Self-Regulatory Organizations; New York Stock Exchange LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change to Suspend Until June 30, 2020 the Application of Its Continued Listing Requirement With Respect to Global Market Capitalization Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”)1 and Rule 19b-4 thereunder,2 notice is hereby given that on March 19, 2020, New York Stock Exchange LLC (“NYSE” or the “Exchange”) filed with the Securities and Exchange Commission (“Commission”) the proposed rule change as described in Items I and II below, which Items have been prepared by the Exchange. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to suspend until June 30, 2020 the application of its continued listing requirement that companies must maintain an average global market capitalization over a consecutive 30 trading-day period of at least $15 million (the “Market Capitalization Standard”). The proposed rule change is available on the Exchange’s website at www.nyse.com, at the principal office of the Exchange, and at the Commission’s Public Reference Room. II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the self-regulatory organization included statements concerning the purpose of, and basis for, the proposed rule change and discussed any comments it received on the proposed rule change.
    [Show full text]
  • Thomson One Symbols
    THOMSON ONE SYMBOLS QUICK REFERENCE CARD QUOTES FOR LISTED SECURITIES TO GET A QUOTE FOR TYPE EXAMPLE Specific Exchange Hyphen followed by exchange qualifier after the symbol IBM-N (N=NYSE) Warrant ' after the symbol IBM' When Issued 'RA after the symbol IBM'RA Class 'letter representing class IBM'A Preferred .letter representing class IBM.B Currency Rates symbol=-FX GBP=-FX QUOTES FOR ETF TO GET A QUOTE FOR TYPE Net Asset Value .NV after the ticker Indicative Value .IV after the ticker Estimated Cash Amount Per Creation Unit .EU after the ticker Shares Outstanding Value .SO after the ticker Total Cash Amount Per Creation Unit .TC after the ticker To get Net Asset Value for CEF, type XsymbolX. QRG-383 Date of issue: 15 December 2015 © 2015 Thomson Reuters. All rights reserved. Thomson Reuters disclaims any and all liability arising from the use of this document and does not guarantee that any information contained herein is accurate or complete. This document contains information proprietary to Thomson Reuters and may not be reproduced, transmitted, or distributed in whole or part without the express written permission of Thomson Reuters. THOMSON ONE SYMBOLS Quick Reference Card MAJOR INDEXES US INDEXES THE AMERICAS INDEX SYMBOL Dow Jones Industrial Average .DJIA Airline Index XAL Dow Jones Composite .COMP AMEX Computer Tech. Index XCI MSCI ACWI 892400STRD-MS AMEX Institutional Index XII MSCI World 990100STRD-MS AMEX Internet Index IIX MSCI EAFE 990300STRD-MS AMEX Oil Index XOI MSCI Emerging Markets 891800STRD-MS AMEX Pharmaceutical Index
    [Show full text]
  • The Impact of Institutional Trading on Stock Prices
    The impact of institutional trading on stock prices The Harvard community has made this article openly available. Please share how this access benefits you. Your story matters Citation Lakonishok, Josef, Andrei Shleifer, and Robert W. Vishny. 1992. “The Impact of Institutional Trading on Stock Prices.” Journal of Financial Economics 32 (1) (August): 23–43. doi:10.1016/0304-405x(92)90023- q. Published Version doi:10.1016/0304-405X(92)90023-Q Citable link http://nrs.harvard.edu/urn-3:HUL.InstRepos:27692662 Terms of Use This article was downloaded from Harvard University’s DASH repository, and is made available under the terms and conditions applicable to Other Posted Material, as set forth at http:// nrs.harvard.edu/urn-3:HUL.InstRepos:dash.current.terms-of- use#LAA NBER WORKING PAPERS SERIES DO INSTITUTIONAL INVESTORS DESTABILIZE STOCK PRICES? EVIDENCE ON HERDING ANDFEEDBACKTRADING Josef Lakonishok Andrei Shleifer Robert W. Vishny Working Paper No. 3846 NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 September 1991 We are grateful to Louis Chan, Jay Ritter, Jeremy Stein, and Richard Thaler for helpful comments; and especially to Gil Beebower and Vasant Kamath for guidance with the data. Financial support from LOR-Nikko and Dimensional Fund Advisors is gratefully acknowledged. This paper is part of NBER's research program in Financial Markets and Monetary Economics. Any opinions expressed are those of the authors and not those of the National Bureau of Economic Research. NBER Working Paper #3846 September 1991 DO INSTITUTIONAL INVESTORS DESTABILIZE STOCK PRICES? EVIDENCE ON HERDING AND FEEDBACK TRADING ABSTRACT This paper uses a new data set of quarterly portfolio holdings of 769 all-equity pension funds between 1985 and 1989 to evaluate the potential effect of their trading on stock prices.
    [Show full text]
  • The Big Bang: Stock Market Capitalization in the Long Run ?
    The Big Bang: Stock Market Capitalization in the Long Run ? Dmitry Kuvshinov and Kaspar Zimmermann † April 2019 Abstract This paper presents new annual long-run stock market capitalization data for 17 advan- ced economies. Going beyond benchmark year estimates of Rajan and Zingales( 2003) reveals a striking new time series pattern: over the long run, the evolution of stock market size resembles a hockey stick. The ratio of stock market capitalization to GDP was stable between 1870 and 1980, tripled with a “big bang” in the 1980s and 1990s, and remains high to this day. We use novel data on equity returns, prices and cashflows to explore the underlying drivers of this sudden structural shift. Our first key finding is that the big bang is driven almost entirely by rising equity prices, not quantities. Net equity issuance is sizeable but relatively constant over time, and plays very little role in the short and long run dynamics of market cap. Second, this price increase is explained by a mix of higher dividend payments, and a higher valuation – or a lower discount rate – of the underlying dividend stream. Third, high market capitalization forecasts low subsequent equity returns, outperforming standard predictors such as the price-dividend ratio. Our results imply that rather than measuring financial efficiency, stock market capitalization is best used as a “Buffet indicator” of investor risk appetite. Keywords: Stock market capitalization, financial development, financial wealth, equity valuations, risk premiums, return predictability JEL classification codes: E44,G10,N10,N20,O16 ?This work is part of a larger project kindly supported by a research grant from the Bundesministerium fur¨ Bildung und Forschung (BMBF).
    [Show full text]
  • Rules of the Stock Market Gametm
    Rules of The Stock Market GameTM Portfolio Rules 1. Each team begins the simulation with $100,000 in cash and may borrow additional funds. How much you may borrow is dependent on the equity in your account. Teams that buy on margin must maintain the Minimum Maintenance requirement. If you dip below this level, you will receive a margin call and must sell off enough investments to meet Minimum Maintenance. If a team still has not met its Minimum Maintenance requirement within seven days, the SMG system will automatically liquidate enough of the portfolio’s investments to collect the required amount. 2. Interest is charged weekly on negative cash balances at an annual rate of 7%, and credited weekly on positive cash balances at an annual rate of 0.75%. Interest is calculated daily, then summed for the week (Saturday – Friday) and posted Saturday (with Friday's date). The daily rate is based on a 365-day year. Daily Interest = Cash x Appropriate Interest Rate (as a decimal) / 365. Bond coupon payments will be posted when due. Bond buyers will also be charged for accrued interest since the last coupon payment. Bond sellers will receive accrued interest since the last coupon payment. 3. Teams may trade only stocks and mutual funds listed on the NASDAQ Stock Market and the New York Stock Exchange. Teams cannot trade over-the-counter or “pink sheet” stocks since they often price incorrectly. In addition, extremely volatile stocks or stocks that trade infrequently are not permitted and may be liquidated to protect portfolio stability. SMG reserves the right to cancel transactions in these securities as deemed necessary.
    [Show full text]
  • Flight-To-Liquidity and Global Equity Returns
    Flight-to-Liquidity and Global Equity Returns Ruslan Goyenko and Sergei Sarkissian * First draft: November 2007 This draft: October 2008 * The authors are from the Faculty of Management, McGill University, Montreal, QC H3A1G5, Canada. Goyenko maybe reached at [email protected] and Sarkissian maybe reached at [email protected]. We thank Yakov Amihud, Kristin Forbes, Andrew Karolyi, Michael Schill, Pedro Santa Clara, and Akiko Watanabe, as well as participants of the Seventh Darden International Finance Conference, the 2008 European Finance Association Meeting, the 2008 World Bank Conference on Risk Analysis and Management and the workshops at the ISCTE Business School and Durham University for useful comments. We are also grateful to Sam Henkel for providing international stock liquidity data. Goyenko acknowledges financial support from IFM2. Sarkissian acknowledges financial support from IFM2, SSHRC, and the Desmarais Faculty Scholarship. Flight-to-Liquidity and Global Equity Returns ABSTRACT Investment practice and academic literature document a great degree of interaction between stock markets around the world and most liquid and safest assets such as the US Treasury bonds. Using data from 46 markets, we examine the joint impact of the “flight-to-liquidity” and “flight-to- quality” on global asset valuation. Our proxy for the flight-to-liquidity/quality is the illiquidity of US short-term Treasury bonds. We find that it is a leading indicator of the stock market illiquidity, and that it is also a strong predictor of future equity returns in both developed and emerging markets. This predictive relation remains intact after controlling for other global and local variables, including the lagged US term spread, dividend yields, equity market returns, as well as global and local stock market illiquidity.
    [Show full text]