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  • THE RELATIONSHIP BETWEEN FINANCIAL

    LIBERALIZATION AND STOCK MARKET EFFICIENCY:

    A STUDY OF EMERGING MARKETS

    NAVAZ NAGHAVI

    FACULTY OF ECONOMICS AND ADMINISTRATION UNIVERSITY OF MALAYA

    KUALA LUMPUR

    2014

  • THE RELATIONSHIP BETWEEN FINANCIAL

    LIBERALIZATION AND STOCK MARKET EFFICIENCY:

    A STUDY OF EMERGING MARKETS

    NAVAZ NAGHAVI

    THESIS SUBMITTED IN FULFILMENT OF THE REQUIREMENTS

    FOR THE DEGREE OF DOCTOR OF PHILOSOPHY

    FACULTY OF ECONOMICS AND ADMINISTRATION UNIVERSITY OF MALAYA

    KUALA LUMPUR

    2014

  • UNIVERSITI MALAYA

    ORIGINAL LITERARY WORK DECLARATION

    NameofCandidate:Navaz Naghavi (I.C/PassportNo:L95235659)

    Registration/MatricNo:EHA100010

    NameofDegree:Doctor of Philosophy

    TitleofProjectPaper/ResearchReport/Dissertation/Thesis(thisWork):

    The relationship between financial liberalization and stock market efficiency: A

    study of emerging markets

    FieldofStudy:Capital Markets

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    6. IamfullyawarethatifinthecourseofmakingthisWorkIhaveinfringedanycopyrightwhetherintentionallyorotherwise,ImaybesubjecttolegalactionoranyotheractionasmaybedeterminedbyUM.

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    Subscribedandsolemnlydeclaredbefore,

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  • ii

    ABSTRACT

    The process of neoliberal globalization has been associated with successive financial

    crisesduringthe1990s.MexicanandTurkishcrisesof1994haveculminatedwiththe

    widespreadAsian crisis of1997; theRussiancrisis of1998, and thepossibilityof an

    impendingcrisis inBrazilduringtheearlymonthsof1999haveraisedseriousdoubts

    about the success of uncontrolled movements of capital. Moreover, global financial

    meltdown in 2008, which can be interpreted as the main challenge of neoliberal

    globalization,emergedasthemostdebatableissueofthecentury.Someeconomistsand

    policymakershaveopinedthatcurrentfinancialcrisisheraldsthefailurenotonlyofan

    economicsystem,butalsooftheideologyoffreemarketandneoliberalism.

    On the other side, in contrast to classical pessimistic view of freedom, modern

    psychologists assume that freedom has a positive influence on subjective wellbeing.

    Residentsofcountrieswithopeneconomiesareexperiencingthepositiveconsequences

    ofmoreeconomicandfinancialfreedom.

    In considerationof the aforementioned concerns, it is investigatedwhether theglobal

    financialandeconomiccrisisisacrisisofneoliberalism.Moreover,thedivergingresults

    ofempiricalliteratureabouttheliberalizationeffectsisjustifiedbasedonthepre-requisite

    economicconditions.Specifically,panelunitroottest,panelcointegration,panelGranger

    causality, General Methods of Moment (GMM) modeling, as well as threshold panel

    regressions,arethemaineconometrictechniquesappliedtoexploretheaforementioned

    issues.

  • iii

    Principally,theseanalysescanbecategorizedintothreemajorparts.First,thisresearch

    examinesthecausaldirectionbetweenfinancialliberalizationandemergingstockmarket

    efficiency in short- and long-term. Second, the effect of financial openness on stock

    market efficiency has been examined with respect to trade openness and quality of

    institutionaspre-requisiteconditionsforbenefitingfromfinancial liberalization.Once

    thepresenceofqualityofinstitutionsandtradeopennessareconfirmedasessentialand

    imperativefactors,thethirdanalyticalsectionfocusesonmeasuringthecriticallevelof

    institutions above which an economy can enjoy the beneficial effects of financial

    liberalization.Similarly,itispositedthat,belowthethresholdlevel,thecountrymaybe

    indangerofexperiencingcrisis.

    Severalkeyfindingsareworthmentioninghere.Theempiricalevidenceontheeffectsof

    financialmarketopennessimpliesthelikelihoodofadeterioratingimpactonstockmarket

    efficiencyintheshortterm,astheriskandcostaspectofliberalizationinitiallyimpede

    stockmarketefficiency.However,inthelongterm,asthestockmarketparticipantshad

    time to adjust to the external shocks, they would move to produce more disclosures.

    Moreover,thestudyfindingslendempiricalsupporttotheexistenceofasignificantlink

    between financial openness and stock market efficiency in countries with high

    institutionalquality.Itisshownthatthesuccessandfailureoffinancialliberalizationare

    assumed to be dependent on country characteristics. This premise implies non-linear

    relationship(U-shaped)betweenfinancialliberalizationandstockmarketefficiency.This

    U-shaped relationship reveals that, below a certain level of institutions, financial

    liberalization may lead the market to experience more stock autocorrelation and

    consequentlystartmovingtowardscrisis.Ontheotherhand,oncethethresholdlevelis

    reached,financialliberalizationhastheabilitytoboostupstockmarketefficiency.

  • iv

    ABSTRAK

    Prosesglobalisasineoliberaltelahdikaitkandenganbeberapakrisiskewanganyangtelah

    berlakusejaktahun1990an.Contohnya,krisisdiMexicodanTurkeypadatahun1994

    yangdisusulidengankrisisdiAsiapada1997;krisisdiRusiapada1998dankrisisdi

    Brazilpadaawaltahun1999telahmenimbulkanpersoalantentangkeupayaanpergerakan

    modal yang tidak terkawal. Tambahan pula, krisis kewangan global pada 2008 telah

    ditafsirkansebagaicabaranutamadalamglobalisasineoliberalyangseringdiperdebatkan

    dalamkurunini.Sesetengahahli-ahliekonomidanpengubal-pengubaldasarberpendapat

    bahawakrisiskewanganbukansahajamenunjukkankegagalandalamsistemekonomi

    tetapijugamenonjolkankegagalanideologipasaranbebasdanneoliberalisme.

    Sebalik daripada pandangan klasikal yang pesimistik itu, ahli-ahli psikologi moden

    mengandaikan bahawa kebebasan mempunyai kesan positif ke atas kesejahteraan

    subjektif (subjective wellbeing). Tambahan pula, penduduk di negara-negara yang

    mengamalkansistemekonomiterbukamempunyaipengalamanyangbaikdalamaspek

    kebebasanekonomidanjugakewangan.

    Ekorandaripadapercangahaanpendapattersebut,tesisiniinginmengkajisamaadakrisis

    ekonomidankewanganglobalmerupakankrisisneoliberalisme.Seperkaralagi,tesisini

    juga ingin menerangkan penemuan kajian empirikal lepas yang bercanggah terhadap

    kesan liberalisasi ituadalahakibatdaripadaprasyaratkeadaanekonomi.Lebihkhusus

    lagi,ujianpanelpuncaunit,ujianpanelkointegrasi,ujianpanelsebab-penyebabGranger,

    kaedahgeneralised method of moment(GMM)danregresi-regresipanelparasambang

    (threshold panel regressions)adalah teknikutamaekonometrikyangdigunakanuntuk

    menerokaiisu-isuyangdinyatakandiatas.

  • v

    Secaraumumnya,analisisinibolehdikategorikankepadatigabahagianutama.Bahagian

    pertama akan mengkaji hubungan sebab-penyebab jangka pendek dan panjang antara

    liberalisasikewangandankecekapanpasaransahambaru.Bahagiankeduaakanmengkaji

    kesan keterbukaan pasaran kewangan kepada kecekapan pasaran saham dengan

    mengambilkira keterbukaan perdagangan dan kualiti institusi sebagai prasyarat yang

    diperlukan untuk memperoleh manfaat daripada liberalisasi kewangan. Setelah

    mengenalpasti kepentingan kualiti institusi dan keterbukaan perdagangan dalam

    liberalisasi kewangan, bahagian ketiga tesis ini akan memberi tumpuan kepada

    pengukurantahapkritikalinstitusi-institusitersebutyangmembolehkansesebuahnegara

    itu menikmati kesan-kesan positif daripada liberalisasi kewangan. Begitu juga, jika

    sesebuah negara berada dibawah paras ambang (threshold level), krisis yang dialami

    berkemungkinanmemudaratkannegara-negaratersebut.

    Beberapahasilkajianyangpentingakandinyatakandisini.Kajianinimendapatibahawa

    kesan-kesanketerbukaanpasarankewanganbesarkemungkinanmenjejaskankecekapan

    pasaransahamterutamanyadalamjangkapendekkeranaaspekrisikodankosliberalisasi

    seringkali menghalang kecekapan pasaran saham. Akan tetapi, dalam jangka panjang

    pelabur-pelabur di pasaran saham mempunyai masa yang mencukupi untuk membuat

    pelarasan terhadapkejutan-kejutan luarandan selanjutnyamampumenghasilkan lebih

    banyak peluang. Di samping itu, hasil kajian ini juga membuktikan bahawa terdapat

    hubunganyangsignifikanantaraketerbukaankewangandankecekapanpasaransaham

    di negara-negara yang mempunyai institusi-institusi berkualiti tinggi. Tambahan pula,

    kajianini jugamenemuibahawakejayaandankegagalanliberalisasikewanganadalah

    bergantungkepada ciri-ciri sesebuahnegara. Idea inimenunjukkanbahawahubungan

    antaraliberalisasikewangandankecekapanpasaransahamadalahtidaklinear(bentuk

  • vi

    U).HubunganyangberbentukUinimenunjukkanbahawapadaparaskebawahinstitusi-

    institusiyangtertentu,liberalisasikewanganakanmenyebabkanpasaransahammenjadi

    lebihbersifatautokorelasidanseterusnyamenujukearahkrisis.Sebaliknya,apabilaparas

    ambangdicapai,liberalisasikewanganakanmempunyaikeupayaanuntukmeningkatkan

    kecekapanpasaransaham.

  • vii

    ACKNOWLEDGMEN