Three essays on financial market development
This dissertation attempts to answer questions revolving around the subject of the determinants of financial market development on the basis of empirical evidences. The first essay addresses the question whether gains from opening a financial market outweigh or are instead surpassed by the negative spillover effects of internationalization and the potentially higher volatility. These gains include lowering the cost of equity capital, potential improvement in institutions, increasing the supply of external finances as well as more participation of foreign investors. As a contribution to the literature, I apply a new methodology to this literature using the system GMM estimator, which is used in the presence of the endogeneity of the regressors to produce consistent and efficient estimates on a set of dynamic panel data covering 104 countries over the period 1980-2006. While essay two shares a common objective of the investigation---the impact of liberalization on equity market development---with essay one, it differs in such a way that stock market development is measured by the stability of a market using the volatility of stock returns rather than the size and the liquidity of a market as in the first essay. The main contribution of this study is to fill in the shortage of panel analysis on the linkage between liberalization and the volatility of stock market, while it improves the volatility measure in the literature by the modification of the basic Generalized Autoregressive Conditional Heteroskedasticity (GARCH) model for volatility estimation and by using a monthly interval to measure volatility rather than a minimum twelve month duration as in Kaminsky and Schmukler (2008), which is more suitable with the highly responsive behavior of stock market prices. Another significant contribution pertains to the first empirical evidence in regard to how financial liberalization combined with restrictions on certain aspects of the capital account such as inflows, outflows, and a limited range of instruments available to foreign investors affect stock market stability. The scope of this empirical analysis covers all monthly data for 13 emerging markets, with the period coverage from February1975 to March 2008 for Argentina, Brazil, Chile, Korea. Mexico, and Thailand, from December 1984 to March 2008 for Columbia, Venezuela, Malaysia, Philippines, and Taiwan, from December 1989 to March 2008 for Indonesia, and from December 1992 to March 2008 for Peru. The policy implied from the first two essays is a cautious approach in opening a financial market. Sound macroeconomic policies are a critical to provide a stable and sustainable condition for the growth of the domestic stock market. Especially during the first phase of opening up, the combination of an increase in competition from liberalization and the unwinding of financial imbalances from the repressed period make macroeconomic stability a more important condition. Although it is necessary, it is not sufficient to prevent the negative spillover effects causing migration of domestic stocks to list abroad and to induce a less volatile market. Adequate legal framework and sufficient institutions should exist at the opening up of a market. However, if the incentive to build a strong legal and institutional system does not exist prior to liberalization and usually derives from the demand of foreign investors who come with liberalization, liberalization should be slow and partial while the domestic market is not strong enough to compete with the major foreign markets and the legal and institutional framework is still in the development process. Policies restricting listings of domestic firms abroad might be necessary to prevent the collapse of the incentive to develop the local market if domestic firms can obtain funds from a better foreign market. Essay three examines the composition of wealth portfolios of Vietnamese households. It shows that a significant share of Vietnamese household savings is held in the form of precious metals and foreign currencies besides other real assets, and the use of financial products for saving and investment purposes although increasing is still very low, particularly for the low-income and low-educated population. I observe a trend of households diversifying their portfolio toward financial assets, rather than substituting their using of precious metal and foreign currency. (Abstract shortened by UMI.).