What factors discriminate developed and emerging capital markets?

Abstract

This article identifies variables that might help an analyst to classify a stock market as either a developed or an emerging market. Although these terms are used widely, the basis for the application of the two descriptors has not been examined, using quantitative method(s) to verify the characteristics associated with each. The aim of this article is to do that, through identification of those variables associated with developed and with emerging markets. Discriminant analysis is applied, to identify a number of characteristics that do successfully differentiate between each group of markets, and helps to provide authenticity to the terms – developed and emerging.

Acknowledgements

The research for this article was done at the UCD. University Putra Malaysia provided on-site assistance at the data-collection stage. Feedback received during the review process resulted in reducing the original manuscript substantially, and we thank the journal for this help. This article was written at the Monash University when Louis Murray was a visiting professor. The authors take responsibility for any errors.

Notes

¹ Statistics on the average ratio of market capitalization to GDP, sourced from 2002 World Bank Indicators, confirms this. Countries classified as high-income, upper-middle-income, lower-middle-income and low-income, respectively, have average ratios of 0.883, 0.513, 0.273 and just 0.080.

² National markets included in each group are as follows: Group D – US, Canada, Netherlands, Finland, UK, Luxembourg, Sweden, Switzerland, Australia, Hong Kong, Norway, Denmark, Austria; Group E1 – Singapore, Germany, Ireland, Spain, Israel, Japan, Korea, Malaysia, New Zealand, Slovenia, Greece, Malta, Argentina; Group E2 – Peru, South Africa, Chile, Mexico, Thailand, Brazil, Hungary, Turkey, Iran, Poland, Philippines, Sri Lanka, Indonesia, India, China.

³ We separate the issue of size from the issue of degree of development. Differences in the legal environment and in levels of enforcement determine ownership concentration and the extent of financing through stock markets. La Porta et al. (2000) show that stock markets in civil law countries are smaller than would otherwise be expected. Size offers little indication of degree of development, or of the extent to which markets operate efficiently and effectively.

⁴ An examination of figures for individual markets indicates that the mean value for E2 is dominated by a few outliers. For example, the number of shares traded per listed company in Turkey is 52 443.83. Institutional differences may be relevant, as the typical value of 1000 shares in one market may differ considerably from their value in other markets.

Table 2. Relative values of study variables, 1995–2003

⁵ Note columns 6 and 7 of Table 4.

⁶ Variables 3, 5 and 7 do not include GDP is not an input measure.

Table 6. Relative rank of study variables using various measures