Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
INTERNATIONAL
FINANCIAL
MANAGEMENT
EUN / RESNICK
Second Edition
8Chapter EightInternational Equity Markets
Chapter Objective:
This chapter discusses both the primary and
secondary equity markets throughout the world.
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
Chapter Outline
? A Statistical Perspective
? Market Structure,Trading Practices,and Costs
? International Equity Market Benchmarks
? World Equity Market Benchmark Shares
? Trading in International Equities
? Factors Affecting International Equity Returns
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
A Statistical Perspective
? Market Capitalization of Developed Countries
? Market Capitalization of Developing Countries
? Measures of Liquidity
? Measures of Market Concentration
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
? Almost 90% of the total market capitalization of
the world’s equity markets is accounted for by the
market capitalization of the developed world.
Market Capitalization of
Developed Countries
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
? The other 10% is accounted for by the market
capitalization of developing countries in
“emerging markets”.
? Latin America
? Asia
? Eastern Europe
? Mideast/Africa
? Recently the growth rates in these emerging
markets have been strong,but with more volatility
than we have here at home.
Market Capitalization of
Developing Countries
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
Measures of Liquidity
? The equity markets of the developed world tend to
be much more liquid than emerging markets.
? Liquidity refers to how quickly an asset can be sold
without a major price concession.
? So,while investments in emerging markets may
be profitable,the focus should be on the long
term.
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
Measures of Market Concentration
? Emerging Markets tend to be much more
concentrated than our markets.
? Concentrated in relatively few companies.
? That is,a few issues account for a much larger
percentage of the overall market capitalization in
emerging markets than in the equity markets of
the developed world.
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
Market Structure,
Trading Practices,and Costs
? Primary Markets
? Shares offered for sale directly from the issuing
company.
? Secondary Markets
? Provide market participants with marketability and
share valuation.
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
Market Structure,
Trading Practices,and Costs
? Market Order
? An order to your broker to buy or sell share
immediately at the market price.
? Limit Order
? An order to your broker to buy or sell at the at a price
you want,when and if he can.
? If immediate execution is more important than the
price,use a market order.
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
Market Structure,
Trading Practices,and Costs
? Dealer Market
? The stock is sold by dealers,who stand ready to buy
and sell the security for their own account.
? In the U.S.,the OTC market is a dealer market.
? Auction Market
? Organized exchanges have specialists who match buy
and sell orders,Buy and sell orders may get matched
without the specialist buying and selling as a dealer.
? Automated Exchanges
? Computers match buy and sell orders.
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
International Equity Market
Benchmarks
? North America
? Europe
? Asia/Pacific Rim
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
North American Equity Market
Benchmarks
Na m e
Sym b o l
Do w J o nes I nd us tr ia l Ave r a g e DJ I A
NAS DAQ C o m b ined C o m p o s it e C C M P
S& P 5 0 0 SP X
T SE 3 0 0 T S3 0 0
M ex ico B OL SA I nd ex M E XB OL
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
European Equity Market Benchmarks
N am e
Sy m bo l
FT - SE 100
UKX
CAC 40
CA C
Frankf urt DAX Inde x
DAX
IBEX Inde x
I B E X
M ilan MIB30
MI B 30
BEL2 0 I nde x
B E L 20
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
Asia/ Pacific Rim Equity Market
Benchmarks
Nam e
S ym b o l
NI K K E I 2 2 5 In d ex NKY
H a n g Sen g In d ex HS I
Si n g St r a it s T im es In d ex S T I
A S X A ll Or d in a r ies In d ex A S 3 0 0
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
World Equity Benchmark Shares
? World Equity Benchmark Shares (WEBS)
? Country-specific baskets of stocks designed to replicate
the country indexes of 14 countries.
? WEBS are subject to U.S,SEC and IRS diversification
requirements.
? Low cost,convenient way for investors to hold
diversified investments in several different countries.
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
Trading in International Equities
? Magnitude of International Equity Trading
? Cross-Listing of Shares
? Yankee Stock Offerings
? The European Stock Market
? American Depository Receipts
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
Magnitude of International
Equity Trading
During the 1980s world capital markets began a
trend toward greater global integration.
Diversification,reduced regulation,improvements
in computer and communications technology,
increased demand from MNCs for global
issuance.
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
Cross-Listing of Shares
? Cross-Listing refers to a firm having its equity
shares listed on one or more foreign exchanges.
? The number of firms doing this has exploded in
recent years.
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
Advantages of Cross-Listing
? It expands the investor base for a firm.
? Establishes name recognition for the firm in new
capital markets,paving the way for new issues.
? May offer marketing advantages.
? May mitigate possibility of hostile takeovers.
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
Yankee Stock Offerings
? The direct sale of new equity capital to U.S,
public investors by foreign firms.
? Privatization in South America and Eastern Europe
? Equity sales by Mexican firms trying to cash in on
NAFTA
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
The European Stock Market
? EASDAQ is a sort of a European NASDAQ that
binds together national exchanges.
? UK,Germany,France,Switzerland,Austria,Italy,
Belgium,Denmark,Portugal,Finland,Greece,
Luxembourg,and the Netherlands.
? All trading is denominated in the euro.
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
American Depository Receipts
? Foreign stocks often trade on U.S,exchanges as
ADRs.
? It is a receipt that represents the number of foreign
shares that are deposited at a U.S,bank.
? The bank serves as a transfer agent for the ADRs
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
American Depository Receipts
? There are many advantages to trading ADRs as
opposed to direct investment in the company’s
shares:
? ADRs are denominated in U.S,dollars,trade on U.S,
exchanges and can be bought through any broker.
? Dividends are paid in U.S,dollars.
? Most underlying stocks are bearer securities,the ADRs
are registered.
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
? Macroeconomic Factors
? Exchange Rates
? Industrial Structure
Factors Affecting International Equity
Returns
Factors Affecting
International Equity Returns
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
? The data do not support the notion that equity
returns are strongly influenced by macro factors.
? That is correspondent with findings for U.S,
equity markets.
Macroeconomic Factors Affecting
International Equity Returns
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
Exchange Rates
? Exchange rate movements in a given country
appear to reinforce the stock market movements
within that country.
? One should be careful not to confuse correlation
with causality.
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
Industrial Structure
? Studies examining the influence of industrial
structure on foreign equity returns are
inconclusive.
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
End Chapter Eight
reserved,
INTERNATIONAL
FINANCIAL
MANAGEMENT
EUN / RESNICK
Second Edition
8Chapter EightInternational Equity Markets
Chapter Objective:
This chapter discusses both the primary and
secondary equity markets throughout the world.
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
Chapter Outline
? A Statistical Perspective
? Market Structure,Trading Practices,and Costs
? International Equity Market Benchmarks
? World Equity Market Benchmark Shares
? Trading in International Equities
? Factors Affecting International Equity Returns
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
A Statistical Perspective
? Market Capitalization of Developed Countries
? Market Capitalization of Developing Countries
? Measures of Liquidity
? Measures of Market Concentration
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
? Almost 90% of the total market capitalization of
the world’s equity markets is accounted for by the
market capitalization of the developed world.
Market Capitalization of
Developed Countries
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
? The other 10% is accounted for by the market
capitalization of developing countries in
“emerging markets”.
? Latin America
? Asia
? Eastern Europe
? Mideast/Africa
? Recently the growth rates in these emerging
markets have been strong,but with more volatility
than we have here at home.
Market Capitalization of
Developing Countries
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
Measures of Liquidity
? The equity markets of the developed world tend to
be much more liquid than emerging markets.
? Liquidity refers to how quickly an asset can be sold
without a major price concession.
? So,while investments in emerging markets may
be profitable,the focus should be on the long
term.
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
Measures of Market Concentration
? Emerging Markets tend to be much more
concentrated than our markets.
? Concentrated in relatively few companies.
? That is,a few issues account for a much larger
percentage of the overall market capitalization in
emerging markets than in the equity markets of
the developed world.
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
Market Structure,
Trading Practices,and Costs
? Primary Markets
? Shares offered for sale directly from the issuing
company.
? Secondary Markets
? Provide market participants with marketability and
share valuation.
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
Market Structure,
Trading Practices,and Costs
? Market Order
? An order to your broker to buy or sell share
immediately at the market price.
? Limit Order
? An order to your broker to buy or sell at the at a price
you want,when and if he can.
? If immediate execution is more important than the
price,use a market order.
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
Market Structure,
Trading Practices,and Costs
? Dealer Market
? The stock is sold by dealers,who stand ready to buy
and sell the security for their own account.
? In the U.S.,the OTC market is a dealer market.
? Auction Market
? Organized exchanges have specialists who match buy
and sell orders,Buy and sell orders may get matched
without the specialist buying and selling as a dealer.
? Automated Exchanges
? Computers match buy and sell orders.
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
International Equity Market
Benchmarks
? North America
? Europe
? Asia/Pacific Rim
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
North American Equity Market
Benchmarks
Na m e
Sym b o l
Do w J o nes I nd us tr ia l Ave r a g e DJ I A
NAS DAQ C o m b ined C o m p o s it e C C M P
S& P 5 0 0 SP X
T SE 3 0 0 T S3 0 0
M ex ico B OL SA I nd ex M E XB OL
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
European Equity Market Benchmarks
N am e
Sy m bo l
FT - SE 100
UKX
CAC 40
CA C
Frankf urt DAX Inde x
DAX
IBEX Inde x
I B E X
M ilan MIB30
MI B 30
BEL2 0 I nde x
B E L 20
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
Asia/ Pacific Rim Equity Market
Benchmarks
Nam e
S ym b o l
NI K K E I 2 2 5 In d ex NKY
H a n g Sen g In d ex HS I
Si n g St r a it s T im es In d ex S T I
A S X A ll Or d in a r ies In d ex A S 3 0 0
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
World Equity Benchmark Shares
? World Equity Benchmark Shares (WEBS)
? Country-specific baskets of stocks designed to replicate
the country indexes of 14 countries.
? WEBS are subject to U.S,SEC and IRS diversification
requirements.
? Low cost,convenient way for investors to hold
diversified investments in several different countries.
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
Trading in International Equities
? Magnitude of International Equity Trading
? Cross-Listing of Shares
? Yankee Stock Offerings
? The European Stock Market
? American Depository Receipts
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
Magnitude of International
Equity Trading
During the 1980s world capital markets began a
trend toward greater global integration.
Diversification,reduced regulation,improvements
in computer and communications technology,
increased demand from MNCs for global
issuance.
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
Cross-Listing of Shares
? Cross-Listing refers to a firm having its equity
shares listed on one or more foreign exchanges.
? The number of firms doing this has exploded in
recent years.
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
Advantages of Cross-Listing
? It expands the investor base for a firm.
? Establishes name recognition for the firm in new
capital markets,paving the way for new issues.
? May offer marketing advantages.
? May mitigate possibility of hostile takeovers.
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
Yankee Stock Offerings
? The direct sale of new equity capital to U.S,
public investors by foreign firms.
? Privatization in South America and Eastern Europe
? Equity sales by Mexican firms trying to cash in on
NAFTA
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
The European Stock Market
? EASDAQ is a sort of a European NASDAQ that
binds together national exchanges.
? UK,Germany,France,Switzerland,Austria,Italy,
Belgium,Denmark,Portugal,Finland,Greece,
Luxembourg,and the Netherlands.
? All trading is denominated in the euro.
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
American Depository Receipts
? Foreign stocks often trade on U.S,exchanges as
ADRs.
? It is a receipt that represents the number of foreign
shares that are deposited at a U.S,bank.
? The bank serves as a transfer agent for the ADRs
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
American Depository Receipts
? There are many advantages to trading ADRs as
opposed to direct investment in the company’s
shares:
? ADRs are denominated in U.S,dollars,trade on U.S,
exchanges and can be bought through any broker.
? Dividends are paid in U.S,dollars.
? Most underlying stocks are bearer securities,the ADRs
are registered.
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
? Macroeconomic Factors
? Exchange Rates
? Industrial Structure
Factors Affecting International Equity
Returns
Factors Affecting
International Equity Returns
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
? The data do not support the notion that equity
returns are strongly influenced by macro factors.
? That is correspondent with findings for U.S,
equity markets.
Macroeconomic Factors Affecting
International Equity Returns
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
Exchange Rates
? Exchange rate movements in a given country
appear to reinforce the stock market movements
within that country.
? One should be careful not to confuse correlation
with causality.
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
Industrial Structure
? Studies examining the influence of industrial
structure on foreign equity returns are
inconclusive.
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
End Chapter Eight
