Estimating the Dynamic Impact of Financial Liberalization on Equity Returns in Southeast Asian Markets

Multinational Business Review, Winter 2008 by Ramcharran, Harridutt, Kim, Doseong

2. SOUTHEAST ASIAN MARKETS: AN OVERVIEW

The size of Southeast Asian equity markets, measured by the capitalization value, increased significantly in the past decade (see Table Al). The average growth rate in all six markets is 7.6 percent for the period 1991-2000; the Philippines experiencing the highest with 19.97 percent and Thailand the lowest with -2.0 percent. Market capitalization also significantly increased from 1991 to 1996. With the exception of Taiwan, there was a sharp decrease in market capitalization in 1997, which can be contributed to the 1997 Asian financial crisis in the region. Since 1997 market capitalization of all six countries increased as most Asian stock markets have gradually recovered from the crisis. However, in 2000 the market capitalization decreased again substantially due to recent depression in the world markets led by the U.S. Together with these growth rates, there is considerable variation in the skewness of individual country capitalization value as well as a very high pattern of cyclicality (Figure 1).

Equity returns were also cyclical (see Table A2) over this period, with a non-normal distribution (right skewness). All countries except Taiwan experienced large negative returns in the stock market in 1997 as the coun- tries were hit severely by the crisis. In 1998 and 1999, stock returns of the countries were largely positive indicating the gradual recovery from the cri- sis. In 2000, all countries except Malaysia experienced large negative returns again due to the worldwide bear market led by the U.S. Figure 1 confirms these observations over time. Skewness and Kurtosis statistics indicate the stock returns are not normally distributed. Also, with the exception of Korea, stock returns of all countries are highly correlated, indicating potential for the region-specific characteristics.

P/E ratios and P /BV ratios (see Table A3 and Table A4) of all countries show a large year-to-year variation. Negative P/E ratios for Korea, Indonesia, and Thailand in 1998 and 1999 indicate that those three countries were most severely affected by the financial crisis in 1997 and not fully recovered from the crisis as of 1999. The sharp drop of P/BV ratios in 1997 and 1998 also can be attributed to the Asian crisis in 1997.

3. LITERATURE REVIEW

Researchers of financial liberalization and privatization in EEM usually confront some complex issues that have to be integrated in their analysis; one is the gradual process of liberalization. Bekaert and Harvey (2002) note the importance of distinguishing between "regulatory liberalization" and "effective liberalization"; the former deals with the passing of laws that seemingly drops all barriers to foreign participation in local markets, while the latter enables foreigners to access local markets and local investors to access foreign markets. Kawakatsu and Morey (1999) examine whether investors react to the "announcement dates" or the "opening dates" of liberalization. This has important implications for analyzing equity price changes in the context of market efficiency.