Professional Documents
Culture Documents
Critical Analysis of Stock Market Stability
Critical Analysis of Stock Market Stability
Critical Analysis of Stock Market Stability
OF
SLOVAKIA, SLOVENIA
AND
IN
PORTUGAL, ROMANIA,
SPAIN
(Assignment towards partial assessment in the subject of Financial Markets and Regulatory
Systems )
SUBMITTED BY:
SHRIYA NAYYAR (944), SONAM JAMBHULKAR (874), PRANJAL MEHTA (871), ADITYA PRATAP
SINGH (894) & TANIYA KANWAT (946)
BUSINESS LAW HONOURS
VIII SEMESTER
SUBMITTED TO:
MR. RITUPARNA DAS, ASSOCIATE PROFESSOR, FACULTY OF MANAGEMENT
TOTAL WORDS: 14, 746
be publicly traded, or raise additional capital for expansion by selling shares of ownership of
the company in a public market. The liquidity that an exchange provides affords investors the
ability to quickly and easily sell securities. This is an attractive feature of investing in stocks,
compared to other less liquid investments such as real estate. History has shown that the price
of shares and other assets is an important part of the dynamics of economic activity, and can
influence or be an indicator of social mood. An economy where the stock market is on the
rise is considered to be an up-and-coming economy. In fact, the stock market is often
considered the primary indicator of a country's economic strength and development. Rising
share prices, for instance, tend to be associated with increased business investment and vice
versa. Share prices also affect the wealth of households and their consumption. Therefore,
central banks tend to keep an eye on the control and behavior of the stock market and, in
general, on the smooth operation of the financial system functions. Financial stability is the
raison raison d'tre of central banks. Exchanges also act as the clearinghouse for each
transaction, meaning that they collect and deliver the shares, and guarantee payment to the
seller of a security. This eliminates the risk to an individual buyer or seller that the
counterparty could default on the transaction (en.wikipedia.org/wiki/Stockmarket 2010).1
General Determinants of Stock Market
Income Levels
According to the demand driven hypotheses, the increase in income will create new
demand for financial services. In support of this theory, Garcia and Liu (1999) found that
income level have positive effect on stock market development in a sample of Latin America
and Asian countries. In the same vein, Yartey (2008) using the modified Calderon Rossell
model on a panel of data of 42 emerging market countries for the period 1990-2004 found
that income level determine stock market development in emerging markets. Other scholars
argue that the effect of income levels is not direct rather higher volume of intermediation
through stock markets cause higher real income growth. Higher income growth in turn
promotes development in stock market. As income increases, its cyclical component impacts
the size of the stock market and its price index. In addition, because of higher income
usually goes hand in hand with better defined property rights, better education and
1
https://profiles.uonbi.ac.ke/jaduda/files/the_determinants_of_stock_market_developmentthe_
case_for_the_nairobi_stock_exchange.pdf
better general environment for business, we expect it to have positive effect on stock
market development (La Porta et al.,1996). On the other hand Nacuer et al., (2007) using
data from Middle East and North African countries found that high income does not promote
development in the stock market.
Macroeconomic Stability
Consistent with previous studies inflation has been used as a measure of macroeconomic
stability (Nacuer et al., 2007; Garcia and Liu, 1999). Macroeconomic stability has been
found to exert effects on stock market development; however, there is no consensus on
the nature of effects. For example, Nacuer et al., (2007) found that macroeconomic instability
has a negative and significant relationship with stock market capitalization. Boyd et al.,
(2001)
found
non
linear
relationship
between
inflation
and
equity
market
development such that as inflation rises, the marginal impact on stock market
development diminishes rapidly. Garcia and Liu (1999) using a pooled data of 15
industrial and developing economies and
using
three
measures of
macro economic
stability: change in inflation; current and last year change in inflation; and standard deviation
of current and last years 12 months inflation rate found no significant effect on stock market
development. In a similar study by Yartey (2008) no significant relationship between inflation
and stock market development was found.
Although there is no agreement on the relationship between macroeconomic stability
and stock market development, we argue that higher levels of macroeconomic stability
encourage investors to participate in the stock market largely because the investment
environment is predictable. Furthermore, macroeconomic stability influence firms
profitability, and so the prices of securities in the stock market is likely to increase. Investors
whose investments are experiencing a capital gain are more likely to channel their savings to
the stock market by increasing their investments, and so this will enhance stock market
development. 2
Stock Market Liquidity
Liquidity has been defined as the ease and speed at which economic agents buy and sell
securities in the stock market (Levine and Zervos, 1998). Indeed, research has been
2 The Macroeconomic Determinants of Stock Market Development in Jordan; International
Journal of Economics and Finance; Vol. 5, No. 6; 2013.
conducted
to
determine
whether
stock
development. Some scholars support the view that liquidity in the stock market is good for
the development of stock market (Levine and Servos, 1998; Yartey, 2008), while others argue
to the contrary (see for example Shleifer and Vishny, 1986; Garcia and Liu, 1999). In support
of positive relationship between stock market liquidity and stock market development, Yartey
(2008) argues that liquid markets affords investors access to their savings, and thus boost
their confidence in stock market investment. More importantly, the more liquid the stock
market, the larger the amount of savings that are channeled through the stock market, thus
enhancing the development of the market. In other words, with a liquid stock market,
investors may not lose access to their savings during the course of the investment
because investors can liquidate their investments easily, quickly and at lower costs (Ngugi,
2003b; Bencivenga and Smith, 1991). In a similar vein, Bencivenga et al.,(1996) argue that
liquidity affect the choice of investments because liquid markets allow the ownership of
capital to be transferred economically, thus reducing transaction cost which in turn favors the
use of long term investments. In effect, liquid markets help improve the resource allocation
and induce more investors to invest in the stock market thus increasing the capitalization of
the market. Other researchers do not support a positive relationship. For instance, Garcia and
Liu (1999) argue that due to their liquidity, stock markets may hurt growth since saving
rates may reduce due to externalities in capital accumulation. In addition, very liquid
stock market encourage investor myopia because they can sell their shares easily which
weakens their commitment and incentive to monitor managerial actions (Shleifer and
Vishny, 1986). Indeed, weaker corporate governance resulting from reduced monitoring
of managers by shareholders impedes the development of stock markets. It is important to
point out; however, that theory is ambiguous about the exact impact of greater stock liquidity
on economic growth. By reducing the need for precautionary savings, increased stock
liquidity may have an adverse effect on the rate of economic growth (Yartey and Adjasi,
2007). In this study, we expect liquid markets to relate positively with stock market
development. 3
Banking Sector Development
3 The determinants of stock market development in the Middle-Eastern and North African
region; www.emeraldinsight.com/0307-4358.htm.
SLOVAKIA
STOCK MARKET AND FACTORS CONTRIBUTING TO ITS STABILITY IN
SLOVAKIA
Slovakia is a sovereign state in Central Europe. 5 The official language is Slovak, a member of
the Slavic language family. The financial market is the market with financial means that is the
one, in which some people are offering them and some are buying. 6 The market is a place
where the sale and purchase of different products are realized. The product is any object
which is able to satisfy the needs or wishes of customers and can be offered in the market 7.
The greater the products ability to meet wishes of buyers, the higher is their success. There
exist the real estate market, automobile market, grain market, labour market, stock market,
insurance market and many others.
Economy: The Slovak economy is considered an advanced economy. Slovakia transformed
from a centrally planned economy to a market-driven economy. Major privatizations are
nearly complete, the banking sector is almost completely in private hands, and foreign
investment has risen. Slovakia adopted the Euro currency on 1 January 2009 as the 16th
member of the Eurozone.
GROWTH
OF
EQUITY CAPITAL
IN THE
COMMERCIAL BANKS
AND
BRANCH OFFICES
OF
Type of bank
6.30.2014
9.30.2014
12.31.2014
Subscri
bed
paidup
subscri
bed
paidup
subscri
bed
paidup
subscri
bed
paidup
Commercial Banks
and Branch Offices
of Foreign Banks
Total
3,288.9
3,288
.9
3,297.8
3,297
.8
3,394.0
3,394
.0
3,445.4
3,445
.4
Commercial
Banks - Total
1,756.7
1,756
.7
1,756.7
1,756
.7
1,839.0
1,839
.0
1,849.0
1,849
.0
Banks
without
foreign
capital
participation
153.9
153.9
153.9
153.9
153.9
153.9
153.9
153.9
Banks
with
foreign
capital
participation
1,602.8
1,602
.8
1,602.8
1,602
.8
1,685.1
1,685
.1
1,695.1
1,695
.1
1,532.2
1,532
.2
1,541.1
1,541
.1
1,555.0
1,555
.0
1,596.4
1,596
.4
of which:
Branch Offices of
Foreign Banks */
low inflation, peg presents issues of eroding external competitiveness unless the
structural adjustment is very quick.12 Fourthly, contagion effects exist in emerging
markets, but importance of domestic forces should not be underestimated. 13. The fifth
group of issues is concerned with management of floating currency. It needs very little
explaining that there is a learning curve for both policy-makers and economic agents,
particularly with regard to signaling, intervention and relationship between interest
rates and the exchange rate.14
3. Trade patterns15: This helps in Market stability. Domestic reforms spurred a
deepening of Slovakias integration into the world economy. The importance of
international transactions has increased even further over time. 16 The average of
exports and imports in 2013 reached almost 90 percent of GDP. The different trend in
these two indicators suggests that Slovakia has remained specialized in more
downstream stages of production than regional peers have, and research shows that
the vulnerability of individual countries is heavily influenced by their position in
GVCs. Nonetheless, given its high degree of competitiveness, Slovakia has continued
12 Canzoneri, M. and Diba, B. (1996), Fiscal Constraints on Central Bank Independence
and Price Stability, CEPR Discussion Paper No. 1463, Center for Economic Policy
Research, London
13 Svejnar J. (1993), CSFR: a solid foundation, in Porter R. (ed.), Economic
Transformation in Central Europe: A Progress Report, CEPR, London
14 Beblav, M. (2000), Monetary policy, in: A. Marcinin and M. Beblav (eds.):
Economic Policy in Slovakia 1990-1999, CSMA and SFPA, Bratislava Bernanke, B. and
Mishkin, F. (1997), Inflation targeting: A new framework for monetary policy, Journal of
economic perspectives, no. 2, pp. 97 - 1 16.
15 Mateus, T. (2004) The Risk and Predictability of Equity Returns of the EU Accession
Countries, Emerging Markets Review, Vol. 5, 241-266.
16 Chen, Qianying, Andrew Filardo, Dong He, Feng Zhu (2014) Global impact of US
monetary policy at the zero lower bound, The HKMA-FRBNY Joint Conference on
Domestic and International Dimensions of Unconventional Monetary Policy, March 20-21,
conference draft.
to gain export market shares, which has translated into growing trade surpluses and
recently pushed the current account balance into positive territory as well. Trade flows
have become more affected by external variables than domestic ones. 17 Domestic
industrial production played a role in driving the cycle of real exports before 2005.
However, this relationship is not statistically significant in the recent period and
exports started to be driven more by FDI. Import cycles began to follow shocks to
euro area growth since 2005. This change probably reflects the fact that the exportoriented sectors engaged in global supply chains are FDI-intensive and mainly serve
foreign consumers.18
4. Insufficient information19: Insufficient information affects the rational decisions on
assessing products in the financial market, obtain relevant information on the
corporation on a timely and regular basis.
Slovakia
Regulation,
<http://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/funds-and-fundmanagement-survey/pages/slovakia-regulation.aspx#1.4>
24 Regulatory Reporting, <http://infinitycapital.sk/EN/regulatory-reporting>
25
Special
Data
Dissemination
Standard,
<http://dsbb.imf.org/pages/sdds/DQAFBaseCollapsed.aspx?ctycode=SVK&catcode=SPI00>
26 National Bank of Slovakia (2011). Evaluation of the Situation in Local Financial Markets during the yearof
2008. Bratislava: Publishing House National Bank of Slovakia.
FORECAST
OF
STOCK
MARKET OF
SLOVAKIA
CONCLUSION
Slovak consumer lending market, in addition to banks, an important role is also currently
played by other providers, which are usually denominated as non-banking companies. On 24 th
March, 2015 a new notification came according to which the non-banking companies can
also give loan without obtaining a license from the National Bank of Slovakia or from other
state authorities, they only have to register in a so-called creditors registry administered by
the NBS. This main obligation of a non-banking company, when compared with the licensing
procedures of other entities in the financial sector represented a significantly simpler entry to
the Slovak market, without the need for fulfilling more demanding procedures.27
The financial institutions are state-regulated companies which operate in the financial market
and have legal subjectivity. They are including also commercial banks and the central bank in
27
Slovakia:
licensing
of
entities
providing
consumer
loans,
<
the territory of the Slovak Republic. The commercial banks are considered to be one of the
most important subjects in the financial system and receive an extraordinary attention.
Together with the central bank they constitute a bank system. The Central Emission Bank is a
managerial centre of the bank system. It manages other banks mainly by means of indirect
economic instruments. The total indebtedness of households in Slovakia measured by the
proportion of debts in their gross disposable incomes still belongs to the lowest one in the
European Union. The higher the burden of incomes caused by installments the less resistant
are households to negative trends including the increase of unemployment or the growth of
credit installments caused by the rising interest rates.
SLOVENIA
STOCK MARKETS
AND
IN
SLOVENIA
(Analysis of Slovenian Stock Markets between 1991-2015 i.e. Post Slovenian Independence)
I.
THE REPUBLIC
OF
SLOVENIA- A BACKGROUND
Slovenia is a nation state on the Adriatic Sea, bordering Italy to the west, Austria to the north,
Croatia to the south and southeast, and Hungary to the northeast. 28 It covers 20,273 square
kilometers (7,827 sq mi) and has a population of 2.05 million. 29 It is a parliamentary republic
and a member of the European Union and NATO. 30 Its capital and largest city is Ljubljana. 31
The human settlement of Slovenia is dispersed and uneven.32
Historically, the current territory of Slovenia was part of many different state formations,
including the Roman Empire and the Holy Roman Empire, followed by the Austro-Hungarian
Empire. In October 1918, the Slovenes exercised self-determination for the first time by cofounding the internationally unrecognized State of Slovenes, Croats and Serbs, which merged
that December with the Kingdom of Serbia into the Kingdom of Serbs, Croats and Slovenes
28 "About Slovenia: Republic of Slovenia", Government of Slovenia, Republic of Slovenia
(Retrieved 24-03-2015).
29 Europe beyond 2000: The enlargement of the European Union towards the East, p. 121,
(Whurr Publishers. 1998).
30 "About Slovenia: Republic of Slovenia", Government of Slovenia, Republic of Slovenia
(Retrieved 24-03-2015).
31 Id.
32 Id.
(renamed Kingdom of Yugoslavia in 1929). During World War II, Slovenia was occupied and
annexed by Germany, Italy, Croatia, and Hungary.33 Afterward, it was a founding member of
the Federal People's Republic of Yugoslavia, later renamed the Socialist Federal Republic of
Yugoslavia. In June 1991, after the introduction of multi-party representative democracy,
Slovenia split from Yugoslavia and became an independent country.34 In 2004, it entered
NATO and the European Union; in 2007 became the first former Communist country to join
the Eurozone, and in 2010 joined the OECD, a global association of high-income developed
countries.35
II.
A. An Overview
Slovenia has a developed economy and is per capita the richest of the Slavic
countries.
With excellent infrastructure, a well-educated work force, and a strategic location
between the Balkans and Western Europe, Slovenia has one of the highest per capita
33 Oto Luthar, From Prehistory to the End of the Ancient World: The Land Between: A
History of Slovenia, p. 15, (Peter Lang, ed., 2008).
34 Ibid.
35 Manoranjan Dutta, Historical Progression of the EU, The United States of Europe:
European Union and the Euro Revolution, (2011).
36
OECD
Economic
Surveys
Slovenia,
http://www.oecd.org/eco/surveys/Overview_Slovenia.pdf
April
2013,
available
at
Slovenia today is a developed country that enjoys prosperity and stability. Slovenia is
considered to have an established, competitive, and flexible economy, with a good
international position in almost all rankings. Despite obvious challenges it remains in
the fast lane, with GDP growth figures just over 6%. What really clinched Slovenias
place among modern, advanced, and competitive European economies was joining the
and favorable international trends, Slovenias exports of goods and services bloomed.
The 2008 Economic Recession- Prospects for the Slovenian economy deteriorated in
the second half of 2008, on account mostly of shifts in the external environment, with
major trading partners entering recession in mid-2008 and external loans becoming
less readily available. The flow of net foreign lending to domestic banks turned
negative in mid-2008 as a result of the spreading financial crisis and related tightening
in international inter-bank markets. As a result, the expansion of domestic bank loans
to domestic nonbank sectors has recorded a significant slowdown.38
The financial sector in Slovenia has not been spared the effects of the global financial
crisis. The market capitalisation of shares on the Ljubljana Stock Exchange declined
57 percent in 2008, and Slovenian banks, while not extensively involved in structured
instruments, are facing refinancing difficulties after years of rapid loan growth and the
strong expansion of business in Southeast Europe. Slovenias largest (and majority
OECD
Economic
Surveys
Slovenia,
http://www.oecd.org/eco/surveys/Overview_Slovenia.pdf
April
2013,
available
at
state-owned) banking groups are still reporting profits, but at drastically lower
levels.39
Slovenias Banking Crisis: The economy is in a deep recession. Slovenia has been hit
hard by a boom-bust cycle, compounded by reform backlogs and the euro area
sovereign debt crisis. Slovenia is facing a severe banking crisis, driven by excessive
risk taking, weak corporate governance of state-owned banks and insufficiently
effective supervision tools. Major state-owned banks have been recapitalised several
times. Additional capital needs are expected but their amount remains uncertain as the
main results of earlier stress tests and due-diligence analysis have not been disclosed
and their assumptions are most likely outdated. The creation of the Bank Asset
Management Company to ring-fence impaired assets is welcome, but lack of
transparency and potential political interference pose risks. The corporate sector has a
severe debt overhang and some firms face insolvency, while existing insolvency
procedures are long and result in low recovery rates. Limited equity markets and the
backlog in the privatisation programme are hindering foreign direct investment,
whose increase would help smooth corporate deleveraging. An agreement on a list of
public assets to be privatised or managed by a new sovereign holding company is still
lacking.40
III.
STOCK MARKET
IN
SLOVENIA
In Slovenia there is currently one organised securities market, The Ljubljana Stock Exchange
(LJSE). The LJSE is a subsidiary (after the takeover in 2008) of the Vienna Stock Exchange
(VSE). Due to legal uncertainty in connection with a new takeover law coming into effect
during the takeover process, a court ruling has for the moment capped the VSEs voting rights
at 50 percent (although the VSE held over 80 percent of the shares as of mid February
2009).41 At issue is whether the VSE will have to offer the same price to those shareholders
that did not accept the initial offer. It is expected that this legal issue will be resolved during
the course of 2009. A new management board member was appointed in February 2009.42
Regarding equities, the exchange operates three market segments: A prime market (7 stocks),
a standard market (18 stocks), and an entry market (61 stocks). KrKA accounts for over 41
39 Damijan, J. (2012), What Went Wrong in Slovenia?, OpEd in Die Presse, 8 September.
40
Slovenia
Faces
'Severe
http://www.cnbc.com/id/100626252.
Banking
Crisis':
OECD,
April
2013,
percent of turnover, and the five largest stocks account for 75 percent of stock exchange
turnover.43 The entry market contains very low liquidity stocks. In addition to stocks, the
exchange also has listings for bonds, collective investment schemes, and structured products,
with only T-bills actually being traded. Trading volume has been very low recently, with only
about EUR 1 million of equities turnover per day. Besides the recent crisis, factors that have
been cited as reasons for low turnover are the low share of foreign portfolio investors of only
7 percent of stock market capitalisation, lack of sophisticated products and services, and high
direct and indirect state ownership in Slovenian companies. Big trades are almost always
done OTC.44
The main stock exchange index in Slovenia is the SBI20. The composition of the index is
described below. The SBI20 declined by almost 68 percent in 2008, and overall equity market
capitalisation fell below EUR 8.5 billion at the end of 2008.45
Data Table
Slovenia - Ljubljana Stock Exchange - Market capitalisation of listed companies
(domestic equities and exclusive foreign listings) - Equity excluding investment fund
European
Central
Bank,
available
at
http://sdw.ecb.europa.eu/quickview.do?
SERIES_KEY=181.SEE.A.SI.JSE0.MKP.W.E
42 Andritzky, Jochen R., Capital Market Development in a Small Country: The Case of
Slovenia
(IMF
Working
Paper
WP/07/229),
Washington,
September
2007
http://www.imf.org/external/pubs/ft/wp/2007/wp07229.pdf
43 Bems, Rudolf, and Piritta Sorsa, Efficiency of the Slovenian Banking Sector, IMF and
OECD, October 2008
44 Andritzky, Jochen R., Capital Market Development in a Small Country: The Case of
Slovenia
(IMF
Working
Paper
WP/07/229),
Washington,
http://www.imf.org/external/pubs/ft/wp/2007/wp07229.pdf
45 Id.
September
2007
shares - Euro
(Securities exchange - Trading Statistics)
Period
value
obs. status
2013
5173
2012
4911
2011
2010
2009
8462
2008
8468
2007
11554
2006
2758994
Country
Report
No.
01/161),
Washington,
http://www.imf.org/external/pubs/ft/scr/2001/cr01161.pdf
September
2001
Slovenia has a single, centralised clearing/settlement company and securities register, the
Central Securities Clearing Corporation (KDD). KDD was established in 1995 and is a
privately owned institution, with its shareholders being the major market participants, namely
banks, stock-broking firms, fund management companies, and issuers. Whereas under the
Slovenian legislation any qualified institutions can clear LJSE trades, in practice all LJSE
trades are still cleared by the Slovenian clearing company KDD. This may change, however,
in connection with the takeover of the LJSE by the Vienna Stock Exchange, and the
increasing international integration of the Slovenian financial market. The shares for all
Slovenian companies have been dematerialised since 1999 and are held in KDDs central
register. KDD records the legal owner of the shares and this is largely relied upon as the basis
on which company law enforcement and compliance is assessed.48
Equity Ownership and Corporate Governance
Equity ownership in Slovenia is widespread, primarily as a result of mass privatisation after
independence. Whereas favourable stock market developments over the past few years had
encouraged further equity investment, primarily through mutual funds, this trend was
reversed in 2008 as the stock market slumped. Also, as a result of the privatisation process,
share ownership in Slovenia is public, as all shares need to be registered in a public share
register maintained by the KDD Securities Depository. Corporate governance is a major
concern in Slovenia, due to the web of crossholdings among companies, including in the
financial sector, and the strong involvement of the state in the ownership of the financial and
the corporate sectors.49
Venture Capital
No.
04/137),
Washington,
May
2004
http://www.imf.org/external/pubs/ft/scr/2004/cr04137.pdf
48 Andritzky, Jochen R., Capital Market Development in a Small Country: The Case of
Slovenia
(IMF
Working
Paper
WP/07/229),
Washington,
http://www.imf.org/external/pubs/ft/wp/2007/wp07229.pdf
49 Id.
September
2007
The venture capital market in Slovenia is considered to be underdeveloped. In the past five
years, there were only 23 venture capital investments i.e. on average 4-5 investments per
year. In order to develop its venture capital market, the Slovene Enterprise Fund (SEF) is in
the process of establishing a public Venture Capital Company (First Venture Capital
Company, LTD). The Venture Capital Company will be managed by First Capital, LTD, a
Fund subsidiary company established in 2007. 50 The latter will be responsible for the
functioning and use of the European Structural resources for SME equity financing through
this public Venture Capital Company.51 First Venture Capital Company will operate within
principles of public-private partnership, co-operate with external experts in the assessment
procedures, and obtain supervision over the use of financial means for SMEs equity
financing.52
Exchange-Traded Derivatives
Currently, there are no organised derivatives and structured products markets in Slovenia.
One of the reasons appears to be the unfavourable tax treatment of derivatives, which
according to market participants attract 40 percent capital gains tax during the first year. A
number of derivatives, mostly warrants and certificates on five of the largest Slovenian
stocks, are, however, traded on the Stuttgart Stock Exchange in Germany. The BoS reports
selling pressure on the LJSE when the issuers of these products liquidate their hedging
positions, as for example in connection with knock-out levels on structured instruments being
breached.53
Recent reform measures
50 Id at p. 64.
51 OECD (2012a), OECD Reviews of Innovation Policy: Slovenia 2012, OECD Publishing,
http://dx.doi.org/10.1787/9789264167407- en.
52 Tang, G. and C. Upper (2010), Debt Reduction after Crises, BIS Quarterly Review,
Bank for International Settlements, September
53 Andritzky, Jochen R., Capital Market Development in a Small Country: The Case of
Slovenia
(IMF
Working
Paper
WP/07/229),
Washington,
http://www.imf.org/external/pubs/ft/wp/2007/wp07229.pdf
September
2007
The major recent changes in regulatory policy were the consequence of the implementation
of EU directives. An important novelty at the LJSE is the possibility of remote access to the
Exchange trading system for member firms. Remote membership is intended for brokerage
firms who would like to trade on the LJSE electronic order book BTS through remote access,
enabled by the LJSE through the Internet. They can thus provide their clients outside of
Slovenia the opportunity to trade on the LJSE and enable them to directly enter the Slovene
capital market.54 To this end, the LJSE amended its Rules in 2007, which now allow for
remote access to the Exchange trading system. Remote trading has not yet taken off, though.
Besides current market conditions, the KDD clearing arrangements do not yet appear ideally
suited to online trading, as (1) currently the KDD retains the power to suspend remote
members clearing bank activities (in the case of a remote member default on delivering cash
or securities toward KDD), (2) the system of fiduciary accounts is not developed in Slovenia,
and (3) the KDD cannot act as a central counterparty. Enterprise issues in Slovenia, including
in the financial sector, are covered more comprehensively in the report of the OECD Steering
Group on Corporate Governance.55
Performance of Stock Market
Notwithstanding Slovenias efforts to bring its securities market legal infrastructure in line
with EU directives, capital markets in Slovenia are not well developed by OECD standards.
Slovenias capital markets are extremely limited in both depth and liquidity, and perhaps as
a consequence, have a narrow, largely domestically focussed investor base. 56 For example,
total market capitalisation of the LJSE remains small in absolute terms, standing at 8.5
billion (as at 31 December 2014), which represented 25.2 per cent of GDP and a sharp drop
from the 57.1 percent share recorded the previous year, when market capitalisation was just
under 20 billion. There were over 200 issuers listed on the Ljubljana Stock Exchange at the
time of the mass privatisations, but this number has steadily diminished over time. Owing in
part to some buyouts but also to the delisting of many smaller companies, there are now only
54 Id.
55 Id.
56
OECD
Economic
Surveys
Slovenia,
http://www.oecd.org/eco/surveys/Overview_Slovenia.pdf
April
2013,
available
at
about 90 or so issuers in the listed equity markets (7 companies comprise the prime segment,
18 are in the standard segment, and 61 are in the entry segment).57
Slovenian companies mostly prefer bank loans as a source of funds, because it is relatively
cheap, so the bond market is largely undeveloped. While a handful of companies draw upon
fixed-income instruments, many of the largest companies are funded directly by loans from
foreign banks, via domestic subsidiaries, foreign branches, or directly from abroad.58
Factors Affecting Stock Market Stability
1. Public ownership is large: The 10 largest listed companies are state owned.
Competition in the product market is not vibrant enough notably as state ownership
is large and the Competition Authority has been lacking resources to facilitate
economic adjustment.59
2. Banking Crisis: Slovenia is facing a severe banking crisis, driven by excessive risk
taking, weak corporate governance of state-owned banks and insufficiently effective
57 Id.
58 International Monetary Fund, Republic of Slovenia: Financial System Stability Assessment
(IMF
Country
Report
No.
01/161),
Washington,
September
2001
http://www.imf.org/external/pubs/ft/scr/2001/cr01161.pdf
59
OECD
Economic
Surveys
Slovenia,
http://www.oecd.org/eco/surveys/Overview_Slovenia.pdf
April
2013,
available
at
supervision tools. Major stateowned banks have been recapitalised several times.
Additional capital needs are expected but their amount remains uncertain as the main
results of earlier stress tests and due-diligence analysis have not been disclosed and
their assumptions are most likely outdated. The creation of the Bank Asset
Management Company to ring-fence impaired assets is welcome, but lack of
transparency and potential political interference pose risks.60
3. Foreign Direct Investment is low per cent of GDP: The corporate sector has a
severe debt overhang and some firms face insolvency, while existing insolvency
procedures are long and result in low recovery rates. Limited equity markets and the
backlog in the privatisation programme are hindering foreign direct investment,
whose increase would help smooth corporate deleveraging. An agreement on a list of
public assets to be privatised or managed by a new sovereign holding company is still
lacking.61
4. Limited Protection of Minority Shareholders: The scope of the stock market to
finance the economy is limited by the high degree of state ownership in the ten largest
listed companies and weak protection of minority shareholders. Privatisation
supported by the definition of a clear asset management strategy, better disclosure of
related-party transactions to enhance investor protection and further strengthening of
operational and financial independence of the Securities Market Agency would all
bolster financial deepening and improve overall market discipline.62
5. Ineffective Supervision by the Securities Market Agency (SMA): A large share of
NPLs is attributed to LBOs. However, there are large-scale circumventions of rules in
this regard and many disclosures are not made.63
60 OECD (2012a), OECD Reviews of Innovation Policy: Slovenia 2012, OECD Publishing,
http://dx.doi.org/10.1787/9789264167407- en.
61 Republic of Slovenia: Financial System Stability Assessment - Update (IMF Country
Report
No.
04/137),
Washington,
May
2004
http://www.imf.org/external/pubs/ft/scr/2004/cr04137.pdf
62
OECD
Economic
Surveys
Slovenia,
http://www.oecd.org/eco/surveys/Overview_Slovenia.pdf
63 Id
April
2013,
available
at
ROMANIA
STOCK MARKETS
AND
IN
ROMANIA
No.
04/137),
Washington,
May
2004
http://www.imf.org/external/pubs/ft/scr/2004/cr04137.pdf
65
OECD
Economic
Surveys
Slovenia,
http://www.oecd.org/eco/surveys/Overview_Slovenia.pdf
April
2013,
available
at
In 2013, Romania had a GDP (PPP) of around $386 billion and a GDP per capita (PPP) of
$19,397. According to CIA's The World Factbook, Romania is an upper-middle income
country economy. According to Eurostat, Romania's GDP per capita (PPS) was at 55% of the
EU average in 2013, an increase from 42% in 2007 (the year of Romania's accession to the
EU).66
After 1989 the country experienced a decade of economic instability and decline, led in part
by an obsolete industrial base and a lack of structural reform. From 2000 onwards, however,
the Romanian economy was transformed into one of relative macroeconomic stability,
characterised by high growth, low unemployment and declining inflation. In 2006, according
to the Romanian Statistics Office, GDP growth in real terms was recorded at 7.7%, one of the
highest rates in Europe. However, a recession following the global financial crisis of 2008
2009 forced the government was forced to borrow externally, including an IMF 20bn bailout
program. GDP has been growing by over 2% each year since. According to IMF, the GDP per
capita purchasing power parity grew from $14,875 in 2007 to an estimated $19,397 in 2014.
Romania has one of the lowest net average monthly wage in the EU in 2013 of 387, and an
inflation of 3.7%. Unemployment in Romania was at 7% in 2012, which is very low
compared to other EU countries.
Industrial output growth reached 6.5% year-on-year in February 2013, the highest in the EU27.
The
largest
local
companies
include
carmaker Automobile
&
RDS andBanca
Transilvania. Exports have increased substantially in the past few years, with a 13% annual
rise in exports in 2010. Romania's main exports are cars, software, clothing and textiles,
industrial machinery, electrical and electronic equipment, metallurgic products, raw materials,
military equipment, pharmaceuticals, fine chemicals, and agricultural products (fruits,
vegetables, and flowers). Trade is mostly centred on the member states of the European
Union, with Germany and Italy being the country's single largest trading partners. The
account balance in 2012 was estimated to be 4.52% of the GDP.
After a series of privatizations and reforms in the late 1990s and 2000s, government
intervention in the Romanian economy is somewhat lower than in other European
economiesIn 2005, the government replaced Romania'sprogressive tax system with a flat
66
OECD
Economic
Surveys
Romania,
http://www.oecd.org/eco/surveys/Overview_Romania.pdf
April
2014,
available
at
tax of 16% for b. oth personal income and corporate profit, among the lowest rates in the
European Union. The economy is predominantly based on services, which account for 51%
of GDP, even though industry and agriculture also have significant contributions, making up
36% and 13% of GDP, respectively. Additionally, 30% of the Romanian population was
employed in 2006 in agriculture and primary production, one of the highest rates in Europe.
Since 2000, Romania has attracted increasing amounts of foreign investment, becoming the
single largest investment destination in Southeastern and Central Europe. Foreign direct
investment was valued at 8.3 billion in 2006. According to a 2011 World Bank report,
Romania currently ranks 72nd out of 175 economies in the ease of doing business, scoring
lower than other countries in the region such as the Czech Republic. Additionally, a study in
2006 judged it to be the world's second-fastest economic reformer (after Georgia).
Since 1867 the official currency has been leu (Romanian leu), and following a denomination
in 2005, it has been valued at 0.20.3. After joining the EU in 2007, Romania is expected to
adopt the euro sometime around 2020.
Stock Market in Romania and determinants affecting its stability
The Bucharest Stock Exchange (BVB) the stock exchange located in Bucharest, Romania.
The total market capitalisation equals almost 30 billion ($33.5 billion) as of January 2015.
By January 2015, there were 83 companies listed on BVB's regulated market. In 2013, the
main indexBET went up by 26.1%, placing BVB as the 14th best performing stock exchange
globally. Since August 2013, Ludwik Sobolewski is the CEO of BVB.67
67
OECD
Economic
Surveys
Romania,
http://www.oecd.org/eco/surveys/Overview_Romania.pdf
April
2014,
available
at
Beginnings of the history of the Bucharest Stock Exchange can be traced back to 1839, when
the commodities-trade exchanges were established in Bucharest. It was nevertheless only
until December 1st, 1882 that the BVB was officially inaugurated. One week later, the first
exchange rates begun being published in the Official Gazette. Throughout its existence, the
activities of the Bucharest Stock Exchange were affected by the socio-political events of the
time, such as the Romanian Uprising of 1907 or the Balkan Wars that took place between
1912 and 1913. The stock exchange was moreover closed during the First World War. When
BVB re-opened following the end of the war, it went through a period of 7 years of
significant growth, followed by a period of 7 years of accelerated loss. The activity of the
Market for Effects, Actions and Exchange was stopped in 1948, with the establishment of
the Communist regime in Romania and the beginning of the nationalisation process. At that
time, shares issued by 93 companies and 77 fixed-income instruments (bond type) were listed
on the Bucharest Stock Exchange. The Bucharest Stock Exchange reopened again in 1995,
after almost 50 years since it was shut down by the Communist regime. The first trading
session was carried out on November 20, 1995. On that date, 905 shares issued by 6 listed
companies were traded. In 2005, BVB absorbed RASDAQ the over-the-counter electronic
stock market. On February 14th, 2008,Erste Bank listed on BVB and became the first
international company listed on the regulated market. Subsequently, Bucharest Stock
Exchange has experienced a continuous development and is now established as the main
stock exchange in Romania. In 2010, Bucharest Stock Exchange listed on its own spot
regulated market under the symbol BVB. In 2010, the Alternative trading system was
launched by BVB for SMEs and start-up companies wanting to raise capital from the market.
At the end of 2014, it was announced that the equities segment of the ATS market will be relaunched under a new name 'AeRO' which stands for Alternative Exchange in Romania.
AeRO is scheduled to relaunch on February 25th, 2015 during an official opening of the
trading session. AeRO will target early stage companies, to finance their projects, growth
stories, increase their visibility and contribute to the development of the business
environment. On December 15th, 2014 BVB has launched a new website, synchronized with
all the channels used by BVB, including social media pages. On March 27, 2015, BVB
announced that it was joining the United Nations Sustainable Stock Exchanges
initiative making it the 19th stock exchange to join. 68
The Bucharest Stock Exchange is a market and system operator authorized by the Financial
Supervisory Authority (FSA) that manages a Regulated market (RM) and an Alternative
Trading System (ATS) compatible with European standards. BVB also operates a market
section called RASDAQ. The following types of financial instruments are traded on BVB:
shares, rights, bonds, fund units, structured products and futures contracts. BVB operating
revenues are generated mainly from trading activity, from membership and listing fees, as
well as from data vending to various users.
Regulated Market
The main market of BVB is a spot regulated market where financial instruments such as
shares and rights (issued by international and Romanian entities), debt instruments
(corporate, municipality and government bonds) issued by Romanian entities and
international corporate bonds, UCITs (shares and fund units), structured products and ETFs
are traded.
In order to be listed on the regulated market, a company has to fulfill a number of
requirements prior to its listing on BVB:
68
Economic
Surveys
Romania,
http://www.oecd.org/eco/surveys/Overview_Romania.pdf
April
2014,
available
at
Have a free-float of at least 25% (shares not owned by the company, nor by strategic
investors)
Be active on the market for the last 3 years and have available financial reports from
that period.
RASDAQ Market
RASDAQ market was launched in 1996 and it accommodates shares and rights issued by
Romanian entities coming from the mass privatization programme. In 1999, there were more
than 5,500 Romanian companies listed on RASDAQ. On September 30, 2014 the Romanian
Parliament decided that the RASDAQ market should be dissolved. The market still remains
operational however it is no longer possible to list on it. Companies listed on RASDAQ can
decide to promote to the regulated or ATS given that they fulfill the necessary admission
criteria.
Legal Framework
The legal framework for exchange operations in Romania is provided by the following legal
acts:
CNVM Regulation no. 2/2006 on Regulated Markets and Alternative Trading System
Additionally, the BVB is governed by Constitutive Act of the Commercial Company Bursa de
Valori Bucuresti S.A. and the Regulation on the Organization and Functioning of the Bursa de
Valori Bucuresti whereas the respective markets are governed by the Bucharest Stock
Exchange Rulebook for Market Operators and ATS Rulebook for System Operators.
Determinants of Stock Market69
Graff (1999) stated that there are four possibilities concerning the causal relationship between
financial development and economic growth: (1) financial development and economic growth
are not causally related. An example of this type of relation could be found in the
69 Romania- Market capitalisation of listed companies (domestic equities and exclusive foreign listings) Equity excluding investment fund shares Euro, European Central Bank, available at
http://sdw.ecb.europa.eu/quickview.do?SERIES_KEY=181.SEE.A.SI.JSE0.MKP.W.E Andritzky, Jochen R.,
Capital Market Development in a Small Country: The Case of Romania (IMF Working Paper WP/07/229),
Washington, September 2007 http://www.imf.org/external/pubs/ft/wp/2007/wp07229.pdf
development of modern economy, in Europe, in the 17th Century. In this case, the economic
growth was the result of real factors, while the financial development was the result of
financial institutions development. (2) financial development follows economic growth. In
this context, economic growth causes financial institutions to change and to develop, so as
both the financial and credit market grow. (3) financial development is a cause of economic
growth. In this case, there could be identified two possibilities, respectively: (a) financial
development is a precondition for economic growth; (b) financial development actively
encourages economic growth (see, e.g. Thornton, 1995). Provided that there are no real
impediments to economic growth, mature financial systems can cause high and sustained
rates of economic growth (see, Rousseau and Sylla, 2001). (4) financial development is an
impediment to economic growth. Similar to the previous posibility, causality runs from
financial development to real development, but the focus lies on potentially destabilizing
effects of financial overtrading and crises (see, e.g. Stiglitz, 2002) rather than on the efficient
functioning of the financial system. This view considers the financial system as inherently
unstable. The economic growth is a complex process that is influenced by more factors, other
than the capital market development. Moreover, capital market development is the results of
many influence factors.70
There are several interdependencies between these factors, which makes it difficult to
establish and isolate the causal relation between the economic growth and the capital market
development. There are several empirical studies that analyse the correlation between the
economic growth and the financial development. Calderon and Liu (2002), studying the
direction of this causality, conclude that, as a general trend, the financial development
generates economic growth, the causal relation being stronger in the emergent countries and
being explained by two channels: the fast capital accumulation and the growth of
productivity. Rajan and Zingales (1998) emphasize that the financial development is a
prediction element for the economic growth, because the capital market reflects the present
value of the future growth opportunities. The ex-ante development of the financial markets
facilitates the ex-post economic growth of the external financing dependent sectors. Levine
(1997) and Levine and Zevros (1998) consider that the capital markets liquidity is a good
predictor of the GDP per capita growth and of the physical capital and productivity growth,
but other indicators of the capital market development such as volatility, size and
international integration are not significant for explaining economic growth. Carlin and
70 Id
Mayer (2003) analyse the link between financial systems and economic growth for developed
countries and reveal a link between financial system and type of economic Quantitative
Methods Inquires 68 activities which can influence the economic growth. Arestis,
Demetriades and Luintel (2001), use the autoregressive vector for an empirical analysis on
five developed economies; their study concludes that the capital market has effects on the
economic growth, but the impact of the banking sector is stronger. Filer, Hanousek and
Campos (1999) notice that capital markets include the future growth rates in current prices,
especially in the developed countries, which is a result consistent with the efficient markets
hypothesis. Although in cross-country analyses it can be depicted a correlation between the
financial development and the economic growth, we can question if, in the emergent
countries, an active capital market is a stimulating factor for the economic growth. An
affirmative answer would imply an important role of the public policies and international aid
targeted at introducing and maintaining the capital market structures (see Filer, Hanousek and
Campos, 1999). The previous empirical studies assessed and quantified the correlation
between capital market development and economic growth using different techniques4 . The
variables used in these studies can be grouped in the following categories: (A) Capital market
variables: - size variables: market capitalization/GDP ratio (used by Filer, Hanousek and
Campos, 1999), the logarithm of the stock market capitalization ratio5 (used by Arestis,
Demetriades and Luintel, 2001); - liquidity variables: turnover ratio6 and value traded ratio7
(used by Levine and Zevros, 1998) - volatility variables: eight-quarter moving standard
deviation of the end-of-quarter change of stock market prices (used by Arestis, Demetriades
and Luintel, 2001) (B) Economic growth variables: logarithm of real GDP (used by Arestis,
Demetriades and Luintel, 2001), GDP growth rate (used by Baier, Dwyer Jr. and Tamura,
2004), GDP per capita growth rate (used by King and Levine, 1993). 71
71 Andritzky, Jochen R., Capital Market Development in a Small Country: The Case of
Romania
(IMF
Working
Paper
WP/07/229),
Washington,
http://www.imf.org/external/pubs/ft/wp/2007/wp07229.pdf
September
2007
SPAIN
ASSESSING SPAINS STOCK MARKET, ITS DETERMINANTS AND FACTORS
CONTRIBUTING TO ITS STABILITY
Introduction
Overall, the rapid development in the market for credit risk transfer played a major role
altering banks functions. Structurally, securitization allowed banks to turn traditionally
illiquid claims (overwhelmingly in the form of bank loans) into marketable securities. The
development of securitization has therefore allowed banks to off-load part of their credit
exposure to other investors thereby lowering regulatory pressures on capital requirements and
raise new funds. The massive development of the private securitization market experienced in
recent years coincided with a period of low risk aversion and scant defaults. This resulted in a
number of shortcomings in firms risk management tools and models, which often used
default figures from this period and tended to underestimate default and liquidity risk. The
most prominent example is the securitization of mortgage loans which diversify idiosyncratic
risks but renders the underlying portfolio subject to macroeconomic risks including declines
in housing prices.72
A number of studies have analyzed the impact of securitization on financial stability from a
wider perspective. The broad idea is that the availability of credit risk transfer mechanisms
have changed banks role dramatically from traditional relationship lending-based to
72
Special
Data
Dissemination
Standard,
<http://dsbb.imf.org/pages/sdds/DQAFBaseCollapsed.aspx?ctycode=SVK&catcode=SPI00>
originators and distributors of loans. This change has implications on banks incentives to
take on new risks.
However, the overall view prior to the crisis was that in addition to allowing lenders to
conserve costly capital, securitization improved financial stability by smoothing out the risks
among many investors. Indeed, a widely held view prior to the recent global credit crisis,
underlined the positive effect of securitization in diversifying credit risk across the financial
system, strengthening its overall resilience. From the perspective of individual banks
securitization was expected to be used to modify their risk profile by allowing them to
manage more effectively their credit risk portfolio geographically or by sector. Scant early
empirical evidence from the pre-crisis period also goes in this direction. It is argued that
securitization increases bank profitability and leverage while reducing overall insolvency
risk. Other studies also found a positive effect of securitization on bank performance. In
particular, banks more active in the securitization market were found to have lower solvency
risk and higher profitability levels and were better capitalized.
At the same time there were progressively more skeptical views on the impact of
securitization on the financial system stability. Some argue that by making illiquid loans
liquid securitization could increase, other things being equal, the risk appetite of banks. Risk
sharing within the financial sector through securitization can also amplify bank risks, they
also can increase systemic risk level shows that an the liquidity of bank assets attained to
securitization increases banking instability and the externalities associated with banking
failures, as banks have stronger incentives to take on new risk.
Lending and housing prices and securitization
An important feature in many countries is the role of securitization in the lending and housing
prices boom and burst. At the macroeconomic level, the dynamics of the relationship between
lending, housing prices and securitization have been largely unexplored although a rising
interest has emerged recently with the financial crisis. There is an empirical literature
studying the interaction of lending and housing prices both at the international and the
individual country levels.In addition the cyclical component of mortgage credit and its
interaction with property prices has been underscored, suggests that developments in the
financial sector such as securitization may have enhanced more financial-sector-induced
procyclicality than in the past creating higher probability for a meltdown.
Interestingly, most the evidence tends to suggest a strong impact from housing prices to credit
than from credit to housing prices. In this respect recent evidence has also shown that
subprime credit activity did not seem to have had much impact per se on subsequent housing
price returns for the US. On the other hand, securitization seems to have strengthened the
impact of housing prices on mortgage credit. This latter factor seems to be particularly
important in light of the recent crisis. In this respect there is mounting evidence suggesting
that securitization activity has led to laxer screening of borrowers in the years prior to the
crisis. The reasoning tends to be that by creating informational distance between the
loans originator and the ultimate bearer of the loans default risk, securitization can
potentially reduce lenders incentives to carefully screen and monitor borrowers. In other
words, the idea is that as securities are passed through from originating banks balance sheets
to the markets there might be more incentives for financial intermediaries to devote less effort
to screen borrowers. In the short term this would contribute to looser credit standards, less
credit-worthy borrowers than in the past were denied credit would be able to obtain it. In the
long term, this would lead to higher default rates.
The laxer screening of borrowers is typically linked to an expansion in the credit granted.
Indeed, using comprehensive information broken down by US postal zip codes it is shown
that securitization played an important role in the expansion of the supply of credit. In this
direction studying the evolution of credit quality in the US from 2000 to 2006 it is suggested
that lending standards declined more in areas that experienced larger credit booms and
housing price increases. They also find that lending standards declined more in areas with
higher mortgage securitization rates. Results suggest that existing securitization practices did
adversely affect the screening incentives. Analyzing the subprime lending they show that
conditional on being securitized, the portfolio with greater ease of securitization defaults by
around 10%25% more than a similar risk profile group with a lesser ease of securitization.
These results suggest that screening and monitoring incentives may diminish with
securitization.
There is also evidence that securitization has quantitatively increase the amount of credit
granted making it less dependent on specific banking or monetary policy conditions. It is also
seen that the increasing depth of the mortgage secondary market fostered by securitization
has reduced the effect of lender financial conditions on credit supply. In line with this
hypothesis, it is found that, prior to the current financial crisis, banks making more use of
securitization were more sheltered from the effects of monetary policy changes. However,
their macro-relevance exercise highlights that the shock-absorber role of securitization on
bank lending could even reverse in a situation of financial distress.
Securitization, risk-taking and rating changes
A recent strand of the literature concentrates on the role that securitization has on risk- taking
and the determinants of the credit quality of the securities themselves. This is the area where
our paper aims to contribute by analyzing the determinants of rating changes also considering
the relationships between securitization, lending and financial instability addressed in the
previous sections.
Part of the most recent empirical literature questioned whether securitization activity makes
further acquisition of risk more attractive for banks. In a report by Krahnen and Wilde (2006)
an increase in the systemic risk of banks, after securitization.
Enhancement of risk appetite is also related to the regulatory capital arbitrage. Securitization
has often been used by banks to lower their regulatory needs for costly equity capital charges.
However banks may have an incentive to securitize less risky loans thereby lowering their
capital positions. This behavior derives from the existence of high capital standards to exploit
the benefits of securitizing assets to undertake regulatory capital arbitrage. Through
securitization, banks can potentially increase capital adequacy ratios without decreasing their
loan portfolios risk exposure. In other words, banks may securitize less risky loans and keep
the riskier ones. In one of the research, it is empirically showed that securitized loans have
experienced lower ex-post defaults than those retained in balance sheet.
Bank capitalization plays a role in this respect. It is suggested by the researchers that pooling
has an information destruction effect that is costly for the intermediary. This effect is reduced
if the intermediarys private information is positively correlated across the assets. Hence if
the incentives of investors and banks are misaligned, banks -as originators- should also have
adequate capital so that warranties and representations can be taken seriously to avoid a bad
use of securitization. A more scant but very recent literature considers the dynamics of rating
changes in securitized deals. Rating agencies perform a unique role in this respect. Analyzing
downgrades, it is found that ABS downgrades have an impact on the originating bank
parents performance. There are evidences that ratings levels were less conservative around
the MBS market peak of 2005-2007. The involvement of rating agencies should go beyond
PORTUGAL
ASSESSING PORTUGALS STOCK MARKET, ITS DETERMINANTS AND
FACTORS CONTRIBUTING TO ITS STABILITY
The assessment of market risk has long posed a challenge to many types
of economic agents and researchers (see, for instance, Granger (2002)
for an overview). Market risk arises from the random unanticipated
changes in the prices of financial assets and measuring it is crucial for
investors. Besides its interest to portfolio managers, the assessment of
market risk is relevant for the overall risk management in banks and
bank supervisors. Although bank failures are traditionally related with an
excess of non-performing loans (the so-called credit risk), the failure of
the Barings Bank in 1995 showed how market risk can lead to
bankruptcy. Furthermore, market risk has received increasing attention
in recent years as banks financial trading activities have grown.
Although the measurement of market risk has a long tradition in finance, there is still no universally agreed upon definition of risk. The
mod- ern theory of portfolio analysis dates back to the pioneering work of
Harry Markowitz in the 1950s. The starting point of portfolio theory rests
on the assumption that investors choose between portfolios on the basis
of their expected return, on the one hand, and the variance of their
return, on the other. The investor should choose a portfolio that
maximizes expected re- turn for any given variance, or alternatively,
minimizes variance for any given expected return. The portfolio choice is
determined by the investors preferred trade-off between expected return
and risk. Hence, in his seminal paper, Markowitz (1952) implicitly
provided a mathematical definition of risk, that is, the variance of
returns. In this way, risk is thought in terms of how spread-out the
distribution of returns is.
Later on, the Capital Asset Pricing Model (CAPM) emerged through the
contributions of Sharpe (1964) and Lintner (1965a, 1965b). Accord- ing
to the CAPM, the relevant risk measure in holding a given asset is the
systematic risk, since all other risks can be diversified away through
port- folio diversification. The systematic risk, measured by the beta
coefficient, is a widely used measure of risk. In statistical terms, it is
assumed that the variability in each stocks return is a linear function of
the return on some larger market with the beta reflecting the
responsiveness of an asset to movements in the market portfolio. For
instance, in the context of interna- tional portfolio diversification, the
country risk is defined as the sensitivity of the country return to a world
stock return. Traditionally, it is assumed that beta is constant through
time. However, empirical research has found evidence that betas are
time varying (see, for example, the pioneer work of Blume (1971, 1975)).
Such a finding led to a surge in contributions to the literature (see, for
example, Fabozzi and Francis (1977, 1978), Sunder (1980), Alexander
and Benson (1982), Collins et al. (1987), Harvey (1989, 1991), Ferson
and Harvey (1991, 1993) and Ghysels (1998) among others). One natural
implication of such a result is that risk measurement must be able to
account for this time-varying feature.
Besides the time-variation, risk management should also take into account the distinction between the short and long-term investor (see, for
ex- ample, Candelon et al. (2008)). In fact, the first kind of investor is
naturally more interested in risk assessment at higher frequencies, that
is, short-term fluctuations, whereas the latter focuses on risk at lower
frequencies, that is, long-term fluctuations. Analysis at the frequency
level provides a valuable source of information, considering that different
financial decisions occur at different frequencies. Hence, one has to
resort to the frequency domain analysis to obtain insights into risk at the
frequency level.
In this paper, we re-examine risk measurement through a novel
approach, wavelet analysis. Wavelet analysis constitutes a very promising
extensive recent literature on this topic (see, for example, Harvey (1995),
Bekaert and Harvey (1995, 1997, 2000, 2002, 2003), Garcia and Ghysels
(1998), Estrada (2000), De Jong and De Roon (2005), Chambet and
Gibson (2008), Dimitrakopou- los et al. (2010), among others). The fact
that the volatility of stock prices changes over time has long been known
(see, for example, Fama (1965)), and such features have also been
documented for the emerging markets. The time variation of risk comes
even more naturally in these countries due to the changing economic
environment resulting from capital market liberal- izations or the
increasing integration with world markets and the evolution of political
risks. In fact, several papers have acknowledged time varying volatility
and betas for the emerging markets (see, for example, Bekaert and
Harvey (1997, 2000, 2002, 2003), Santis and Imrohoroglu (1997), and
Estrada (2000)). Moreover, the process of market integration is a gradual one, as emphasized by Bekaert and Harvey (2002). Therefore,
methods that allow for gradual transitions at changing speeds, such as
wavelets, are preferable to segmenting the analysis into various
subperiods. Hence, the emerging markets case makes an interesting
example for measuring risk with the continuous wavelet transform.
The Portuguese economy registered a lower decline in economic activity
during 2013 (-1.4%), in comparison to 2012 (-3.3%). The positive
performance of exports and a smaller contraction in domestic demand
and of investment were determining factors in this recuperation.
In the 3rd quarter of 2014, INE estimated an increase of 1.1% in GDP in
comparison to 2013. This was due to a more positive performance in
domestic
demand,
consumption,
mainly
meanwhile
reflected
net
in
external
the
increase
demand
had
of
a
private
negative
The projections from the Banco de Portugal (BP) point to a real increase
in the Portuguese economy of 0.9% in 2014, supported by the increase of
consumption and private investment, as well as by exports (+2.6%). The
combined current and capital balance should be positive in 2014, 2.6% of
GDP. For 2015-2016 GDP is forecast to grow 1.5% and 1.6%, respectively,
being above the projected for the Euro Zone by the European Central
Bank
(1%
and
1.5%
respectively).
The
BP
considers
that
this
in
external
imbalances
and
an
effort
in
budgetary
consolidation.
In May 2014, the Government announced the end of the Economic and
Financial Assistance Programme - PAEF, (agreed with the EU and the
IMF in May 2011), without resorting to additional external financial
assistance thus gaining access to international debt markets. After three
structural
primary
budget
surplus
in
2013,
ongoing
budget
In the first nine months of 2014, machinery and tools continue to be the
most exported products (14.5% of the total), followed by vehicles and
other transport material (11.1%), mineral fuels (8.3%), base metals
(8.0%) and plastics and rubber (7.4%). These five main product groups
represent about 49% of the total exported by Portugal during this period
(against 51% in the previous year).
The principal destination for exports of goods is the EU28 (71.5% of the
total in the January-September 2014 period), PALOP (7.6%) and NAFTA
(5.3%), being that the EU28 and NAFTA increased their quotas in
relation to the same period in 2013. Portugals main clients Spain,
Germany, France, Angola and United Kingdom together represent
around 60% of total exports in this period. The main clients remain
almost identical in relation to 2013, with the exception of China (10th
client) that gained importance in relation to Morocco that dropped out of
the TOP 10.
In relation to the imports of goods, mineral fuels, machinery and tools,
agricultural products, vehicles and other transport material and chemical
products lead the ranking of purchases made during the JanuarySeptember 2014 period, representing 64% of the total. The EU28 was the
origin of most of the products imported during this period with 74.2% of
the total (against 70.7% in the same period of 2013), being Spain,
Germany, France, Italy, the Netherlands the main suppliers, that together
represented 62% of imports. A special mention is made to the arrival of
Brazil in the Top 10 of suppliers, to the detriment of Russia, and the
increase in the positions of Italy, United Kingdom and China and the
decrease in the position of Angola.
bank system. The Central Emission Bank is a managerial centre of the bank system. It
manages other banks mainly by means of indirect economic instruments. The total
indebtedness of households in Slovakia measured by the proportion of debts in their
gross disposable incomes still belongs to the lowest one in the European Union. The
higher the burden of incomes caused by installments the less resistant are households
to negative trends including the increase of unemployment or the growth of credit
installments caused by the rising interest rates.
The Slovakia Stock Market (SAX) decreased to 237.40 Index points in March from
257.98 Index points in February of 2015. Stock Market in Slovakia averaged 225.69
Index points from 1995 until 2015, reaching an all time high of 507.98 Index points in
March of 2005 and a record low of 70.19 Index points in March of 2000.
Slovenia- Notwithstanding Slovenias efforts to bring its securities market legal
infrastructure in line with EU directives, capital markets in Slovenia are not well
developed by OECD standards. Slovenias capital markets are extremely limited in
both depth and liquidity, and perhaps as a consequence, have a narrow, largely
domestically focussed investor base. For example, total market capitalisation of the
LJSE remains small in absolute terms, standing at 8.5 billion (as at 31 December
2014), which represented 25.2 per cent of GDP and a sharp drop from the 57.1
percent share recorded the previous year, when market capitalisation was just under
20 billion. There were over 200 issuers listed on the Ljubljana Stock Exchange at the
time of the mass privatisations, but this number has steadily diminished over time.
Owing in part to some buyouts but also to the delisting of many smaller companies,
there are now only about 90 or so issuers in the listed equity markets (7 companies
comprise the prime segment, 18 are in the standard segment, and 61 are in the entry
segment).73
in
domestic
demand
of
investment
were
example is the securitization of mortgage loans which diversify idiosyncratic risks but
renders the underlying portfolio subject to macroeconomic risks including declines in
housing prices.74
Finally, the market capitalizations of these 5 Euro Zone members compare as under:
74
Special
Data
Dissemination
Standard,
<http://dsbb.imf.org/pages/sdds/DQAFBaseCollapsed.aspx?ctycode=SVK&catcode=SPI00>