Frontier Emerging Equity Markets Securities Price Behavior and Valuation PDF
Preview Frontier Emerging Equity Markets Securities Price Behavior and Valuation
FRONTIER EMERGING EQUITY MARKETS SECURITIES PRICE BEHAVIOR AND VALUATION FRONTIER EMERGING EQUITY MARKETS SECURITIES PRICE BEHAVIOR AND VALUATION yb Oliver .S Kratz KLUWER ACADEMIC PUBLISHERS Boston / Dordrecht / London Distributors for North, Central and South America: Kluwer Academic Publishers 101 Philip Drive Assinippi Park Norwell, Massachusetts 02061 USA Telephone 187( ) 871-6600 Fax (781) 871-6528 E-Mail <kluwer @wkap.com> Distributors for all other countries: Kluwer Academic Publishers Group Distribution Centre Post Office Box 223 3300 AH Dordrecht, THE NETHERLANDS Telephone 13 87 6392 293 Fax 13 78 6546 474 E-Mail <services @ wkap.nl> Electronic Services <http://www.wkap.nl> Library of Congress Cataloging-in-Publication Data Kratz, Oliver ,.S 1971- Frontier emerging equity markets securities price behavior and valuation / by Oliver .S Kratz. p. cm. Includes bibliographical references and index. ISBN 0-7923-8585-3 .1 Securities--Prices--Russia (Federation) .2 Stock-exchanges-- Russia (Federation) I. Title. HG5580.2.A3 K73 1999 332.63'2'0947 -- dc21 99-33709 CIP Copyright © 1999 by Kluwer Academic Publishers All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, mechanical, photo- copying, recording, or otherwise, without the prior written permission of the publisher, Kluwer Academic Publishers, 101 Philip Drive, Assinippi Park, Norwell, Massachusetts 02061 Printed on acid-free paper Printed in the United States of America To Leanna and Horst Kratz (1939.1989) Contents Foreword Chapter 1 Introduction - The Markets that came in from the cold 1 I.A. Preview by chapter 31 Chapter 2 Market Efficiency in Frontier Emerging Markets 17 II.A. Market efficiency 18 II.A. .1 Market efficiency in developed markets 18 II.A.2. Empirical results in developed markets 22 II.A.2.1. Tests of autocorrelation in developed markets" 24 II.A.2.2. Variance ratio tests in developed markets 25 II.A.3. Autopsy of absolute market efficiency II.B. Market efficiency in emerging markets 29 viii Contents II.B.1. Overview of methodologies for measuring market efficiency in emerging equity markets 29 II.B.2. Review of previous studies on market efficiency in emerging equity markets 36 II.B.3 Behavioral finance offers clues to the reasons of market inefficiency 44 Chapter 3 Frontier Emerging Equity Market Infrastructure 49 III.A. The early equity market 50 III.A. .1 Genesis of the Russian equity market 50 III.A.2. Emergence of an equity market 53 III.B. Equity market infrastructure 54 III.B. .1 Regulatory system 54 III.B.2. Cleating and settlement 57 III.B.3. Custody 59 III.B.4. The Russian Trading System (RTS) and National Association of Securities Markets Participants (NAUFOR) 60 III.B.5. Taxation and foreign investment approval 63 III.B.6. Accounting peculiarities in frontier equity markets 64 III.C. A snapshot of current problems affecting the equity market valuation of Russia 67 Chapter 4 Data and Descriptive Features of a Frontier Equity Market 71IV.A. Descriptive statistics of Russian securities 72 ix IV.A.1. Data sources and selection of Russian securities 72 IV.A.2. The probability distribution of individual shares 74 IV.B. Mean-variance frontier 78 Chapter 5 Information Channels in Frontier Emerging Markets 83 V.A. Informational channels and brokerage research coverage index 83 V.A. .1 Information channels of security information on Russian equities 83 V.A.2. Brokerage report coverage index 86 V.A.3. AK&M Survey 88 V.A.4. Creation of top-, medium-, and bottom-transparency portfolios 89 Appendix I to chapter V. 93 Chapter 6 Econometrics of Measuring Frontier Equity Market Efficiency 95 VI.A. From random walk to relative market efficiency 97 VI.A.1. The random walk model as a tool to measure market efficiency 97 VI.A.2. Practical implications of deviation from the random walk 99 VI.B. Three types of random walks and the ratio test variance 100 Contents VI.B.1. Random walk 1 (RW ,)1 RW2, and RW3 001 VI.B.2. Test of the Random walk 3 (RW3) with the variance ratio test 101 VI.B.3. Computation of the variance ratio test 301 VI.C. The variance test applied to the pre-emerging equity market of Russia 701 Chapter 7 Running the Numbers on a Frontier Market 109 VII.A. Relative market efficiency and security transparency 109 VII.A.1. Presentation of results 109 VII.A.2. Relative market inefficiency - a case of market segmentation 111 VII.B. Evolving relative market efficiency over time 116 VII.B.1. Results confirming improving relative market efficiency over time 116 Chapter 8 ADRs and GDRs - International Depository Receipts in Frontier Markets 119 VIII.A. Definition and benefits of ADRs and GDRs 121 VIII.A. .1 Four types of depository receipt programs 321 VIII.A.2. Sponsored Level-I depository receipts 321 VIII.A.3. Sponsored Level-II depository receipts 124 VIII.A.4. Sponsored Level-III depository receipts 521 xi VIII.A.5. Private placements - 144A and Reg S 126 VIII.B. The Russian case of depository receipt facilities 128 VIII.B.1. Description of Russian depository receipt facilities 128 VIII.B.2. Trading trends in Russian ADRs 331 VIII.B.3. Post-ADR issuance performance of underlying shares 136 VII.B.4. Methodology for measuring share performance of pre-and post-ADR issuance in Russia 137 VIII.B.5. Results of effects of depository receipts on share prices in Russia 142 VIII.B.6. Frontier market ADR fitness 144 Chapter 9 Valuation Approaches to Frontier Equity Markets 147 IX.A. Gauging the future performance of Russian equities during the early phase of the pre-emerging market life-cycle 841 IX.A. .1 Description of the model 148 IX.A.2. Data description 150 IX.A.2.1. Agreeing on valuation parameters 150 IX.A.3. Western Auditor, ADR, and Market Capitalization (WAM) -Dynamic measures of early market Segmentation 351 IX.A.4. Methodology 159 IX.A.5. Results 161 xii Contents IX.B. Screening framework for pre-emerging market securities valuation 165 IX.B. .1 Four 'top-down' layers and one double-shelled nucleus of analysis 165 IX.B.2. Political risk check list 166 IX.B.3. Macro screening tool 168 IX.B.3.1. Equity valuation and the risk free rate - crucial nexus in frontier emerging markets - theoretical underpinnings 169 IX.B.4. Equity infrastructure assessment 174 IX.B.5. Overview of screening framework 175 Appendix I to chapter IX. 176 Appendix II to chapter IX. 177 Chapter I0 The Philology of Frontier Equity Markets 179 X.A. Anatomy of market opinion formation in frontier emerging markets 179 X.B. Aristotle's Art of Persuasion applied to frontier market dynamics 183 X.C. Unweaving the frontier market debate with the theory of memes 186 Bibliography 191 Index 197
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