Financial liberalization and the behavior of reversals in emerging market economies
Document Type
Article
Publication Date
6-14-2022
Abstract
Purpose - This paper investigates the behavior of contrarian strategy payoffs under varying degrees of financial liberalization in the context of Asia-Pacific emerging market namely China, India, Indonesia, Korea, Malaysia, Pakistan, Philippines and Thailand for the period 1997-2017. These markets represent economies that display a gradual change in the degree of financial liberalization instead of fully opening their markets to foreign investors at once. Design/methodology/approach - Using a daily dataset of 2,468 firms and four different measures of the degree of financial liberalization, the paper employs portfolio formation, panel regressions and binary modeling methods to reveal the impact of partial and complete financial liberalization on contrarian returns. Findings - This paper documents a negative relationship between the degree of financial liberalization and contrarian strategy payoffs. The results further indicate that small-sized emerging markets reveal more significant and higher contrarian returns as compared to their larger counterparts. Moreover, the returns are significantly higher during negative market states, higher volatility and crises periods. The study findings are consistent with the investor-base broadening hypothesis. Practical implications - The findings may serve as a useful input for investors and fund managers to devise contrarian investment strategies in emerging market economies. Together, the study provides additional insights for policymakers in managing financial liberalization and integration policies within their respective countries. Originality/value - This study provides a novel viewpoint by examining the relationship between the degree of financial liberalization and contrarian strategy payoffs. The authors contribute to the existing debate by shifting the discussion to the investor-based broadening argument in which small and less liberalized emerging markets offer opportunities for investors and fund managers to produce abnormal contrarian returns that cannot be earned by other conventional investment strategies.
Keywords
Reversals, Contrarian payoffs, Financial liberalization, Emerging markets
Divisions
finance
Funders
Universiti Malaya (Grant No: RP060C-17SBS)
Publication Title
International Journal of Emerging Markets
Volume
17
Issue
6
Publisher
Elsevier
Publisher Location
HOWARD HOUSE, WAGON LANE, BINGLEY BD16 1WA, W YORKSHIRE, ENGLAND