The theme of this research is international financial integration with particular emphasis on the integration of financial markets in the emerging markets with international markets. A priori one should expect that emerging markets are becoming more integrated with international markets over time. This is because many emerging markets implemented financial liberalisation programmes from
the 1980s onwards. The policy choice can be explained by an expected positive relationship between the level of financial development and economic growth. Specifically, emerging market authorities have deregulated banking sectors, liberalised equity markets, and opened capital accounts.
The research is written as three working papers. The first working paper uses an event study methodology to determine whether the announcement of mergers and/or acquisitions (M&A) of ownership stakes in target banks in the emerging markets by acquiring banks from industrialised nations (international banks) generates value for bank shareholders. Returns to target bank acquiring
bank shareholders as well as joint weighted abnormal returns are calculated across a sample of 74 M&A transactions involving 46 target banks over the period 1998 to 2005. The results find it is difficult to find so-called "win-win" situations where target bank and acquiring bank shareholders realise significant positive returns. Whereas target bank shareholders mostly realise a value gain, the same is not true for acquiring bank shareholders implying there is no evidence of a redistribution of wealth from emerging markets to industrialised markets. Joint returns are significantly lowered when majority control is acquired, and when large target banks are acquiTed. Joint return significantly increases when international banks acquire minority control in emerging market banks.
The second working paper employs a multivariate asymmetric BEKK GARCH model to jointly estimate the conditional mean and conditional vatiance of FX returns for the Japanese yen, Swiss franc and British pound vis-a-vis the US dollar from 1975 to 2005. US macroeconomic news announcements are significant in the FX price discovery process with larger increases in consumer
prices and short-tenn interest rates positively affecting spot returns. These relationships are not observed when the US is in recession. Currency depreciation affects the variance of spot returns (but not always in the same direction) and the effects are larger when the US economy is in recession.
Shocks in "home" markets are more important in explaining the variance of returns though there is evidence of cross-border volatility transmission. News effects are persistent for at least one day. The dynamics of FX volatility show that conditional volatility, covariance and cotTelation coefficients between FX returns are time varying with clearly visible patterns.
The GARCH methodology is used to jointly estimate conditional price discovery and volatility transmission processes in the BRIC countries in the third working paper. Asset prices are fairly predictable with lagged currency movements and local stockmarkets movements significant. The research establishes the importance of US macroeconomic fundamentals in pricing assets in emerging
markets. Whilst spillover effects are observed between markets, the variance of asset price returns is more responsive to own market news. The conditional variance of FX returns is lower than local stock market returns, and is responsive to episodes of financial crisis and changes in exchange rate regime. Conditional covariances and correlations are time-varying. On average, correlations tend to
be fairly small in magnitude suggesting the integration process is far from complete, but this is good news for investors wishing to internationally diversify risk.