ISE REVIEW

Stochastic Trends and Stock Prices in Emerging Markets: The Case of Middle East and North Africa Region 

Lokman Gündüz & Mohammed Omran

Abstract

In this paper, the individual stochastic structure of a log of weekly stock indices from Turkey, Israel, Egypt, Morocco and Jordan of MENA markets are investigated. Results from different unit root tests indicate that all five series seem to contain a stochastic trend and thus are nonstationary in levels. Presence of a unit root implies that shocks to stock prices are permanent and consequently, stock prices may not be predictable.  Tests are also conducted to examine the common stochastic trends in a system of these emerging stock prices. No evidence of cointegration is detected in these emerging markets. Therefore, the stock markets of MENA region are segmented and do not exhibit any long-run co-movements. This in turn implies the existence of potential gains from international stock market diversification. 

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Pre-Trade Transparency 

Ananth Madhavan, David Porter & Daniel Weaver

Abstract 

A crucial question for security markets concerns the impact on liquidity of public display of investors’ latent demands. This topic is central to on-going debates about floor versus automated trading systems, the informational advantages of market makers, and inter-market competition between trading systems with different levels of transparency. We examinee this topic using transaction-level data from the Toronto Stock Exchange (TSE) before and after the limit order book was publicly disseminated on April 12, 1990. This natural experiment allows us to isolate the effects of transparency while controlling for stock-specific factors and for the type (floor or automated) of trading system. We show that, contrary to popular belief, transparency has detrimental effects on liquidity. In particular, execution costs increased after the introduction of the system even when controlling for other factors that may affect trading costs. We discuss the implications of these results for practitioners.

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Prediction of Financial Failure With Artificial Neural Network Technology and an Emprical Application on Publicly Held Companies  

Birol Yıldız 

Abstract 

Multivariate statistical techniques are used widely and successfully in financial failure prediction models. On the other hand, the existing applications of multivariate statistical techniques on financial failure pay insufficient attention to assumptions of these techniques. Therefore, some methodological problems arise about generalization of the models that are developed with in multivariate statistical techniques. Artificial Neural Network is an alternative technology to predict financial failure. This study indicated that neural networks provided better results then multivariate discriminant analysis in prediction of financial failure.

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The Investment of Emerging Capital Markets and the Role of Derivative Securities  

Turhan Korkmaz

Abstract 

In this paper, we analyze the need and the role of derivative securities in the emerging capital markets to insure the  risks with low costs. Emerging Markets with Derivative Securities (EMDS) can produce more financial products to attract an increased inflow of foreign and local savings to these markets. We create a portfolio index that includes the emerging countries with derivative products and we compare the index returns with the International Finance Corporation (IFC) Composite and regional indices. Our portfolio has proven to outperform all these indices. Furthermore, in order to test the alternative investment opportunities, we apply Markowitz mean-variance model and we observe that most of the efficient portfolio combinations are composed of EMDS Index.

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Behavioral Finance Theories and the Price Behavior of the ISE Around the Start of the Disinflation Programme   

Numan Ülkü

Abstract 

I present a detailed review of four recent behavioral theories to explain the pervasive evidence of under- and overreactions in financial markets. Then, I formally show that the price behavior of the Istanbul Stock Exchange (ISE) stocks around the commencement of the 2000-2003 disinflation programme is a good example of both under-, but especially of overreactions. Further analysis indicates that this price behavior fits interestingly well to (are explicable by) the predictions of these behavioral theories. Small investors would benefit a lot from the lessons of behavioral theories. 

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