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Performance Characteristics of Emerging Capital Markets

Introduction

The article by Barry at al. “Performance Characteristics of Emerging Capital Markets” (1998) describes the capital markets in developing countries. These markets are believed to have a great potential for development, as long as about 80 percent of population belongs to them. Now they produce only 20 percent of GNP in the world, although they have had developed significantly for the last decades. This potential makes the emerging markets an interesting object for economic analysis. Thus, the article describes how the emerging markets’ characteristics allow the academics to understand the role of financial markets and to better understand their development.

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Performance of Emerging Markets

In the first part of the article, the performance of markets in developing countries is analyzed. A developing country is regarded as a country with an “annual GDP per capita less than $8,955” (Barry at al., 1998). The markets in such countries are characterized by a high volatility and high return on investment. The author has analyzed this statement and has created tables with data proving it. For example, according to this analysis, a growing market has shown a 1.50 percent monthly geometric mean return whereas for Nasdaq it was only 0.96 percent (Barry et al., 2021). Thus, the analysis of data conducted by the author proved the statement concerning the high return, high risk, and diversification benefits of emerging markets. However, there is also another point of view, according to which the analysis can be biased, as high return can be seen only on the recently emerged markets. Some of the emerging markets, however, exist longer periods, which is not reflected in the study.

In the second part of the article, the author comes to the conclusion that the returns of the emerging markets may be high or not high, depending on the period of time. Volatility, however, is high regardless of the time examined. When the stocks of emerging market are combined with developed market assets, they provide benefits for diversification. However, in crisis times they may not provide such benefits, which is proved by the data and reflected in the graph.

Liquidity and Investability of Emerging Markets

The article reveals the issues of the market liquidity and investability. It is stated that the liquidity of the market is defined by its turnover ratio, whereas for the emerging markets it is lower than for the U.S. ones. Investors usually prefer the markets, where the liquidity is high. However, it varies for different emerging markets, with the highest turnover in Turkey and the lowest one in Nigeria. Besides, the author analyses the real performance of investors in the emerging markets. The investable index shows that the markets with a broad diversification provide higher returns compared to the composite index. However, most of the countries analyzed demonstrate lower returns and a less diversification benefit than direct investment.

In the conclusion, the author summarizes the issues that were addressed in the article. It is stated that the emerging markets provide great diversification opportunities for the investors. Some of the emerging markets can become well-diversified, but some can become submerged. The potential of these markets is changing depending on the range of factors. There are also some questions that have to be answered. For example, it should be examined how these markets are influenced by economic reforms. Besides, advantages and disadvantages of the family structures regulating the holding companies should be analyzed. The corporate financial policies for companies in such markets are also an important issue that should be addressed in further research.

Reference

Barry, C. B., Peavy, J. W., & Rodriguez, M. (1998). Performance Characteristics of Emerging Capital Markets. Financial Analysts Journal, 54(1), 72–80. Web.

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StudyCorgi. (2022, November 6). Performance Characteristics of Emerging Capital Markets. Retrieved from https://studycorgi.com/performance-characteristics-of-emerging-capital-markets/

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StudyCorgi. 2022. "Performance Characteristics of Emerging Capital Markets." November 6, 2022. https://studycorgi.com/performance-characteristics-of-emerging-capital-markets/.

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StudyCorgi. (2022) 'Performance Characteristics of Emerging Capital Markets'. 6 November.

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