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Chapter EightInternational ter Objective:This chapter discusses both the primary andsecondary equity markets throughout the world.EUN / RESNICKSecond EditionIrwin/McGraw-HillCopyright 2001 by The McGraw-Hill Companies, Inc. All rightsreserved.

Chapter Outline A Statistical PerspectiveMarket Structure, Trading Practices, and CostsInternational Equity Market BenchmarksWorld Equity Market Benchmark SharesTrading in International EquitiesFactors Affecting International Equity ReturnsIrwin/McGraw-HillCopyright 2001 by The McGraw-Hill Companies, Inc. All rightsreserved.

A Statistical Perspective Market Capitalization of Developed CountriesMarket Capitalization of Developing CountriesMeasures of LiquidityMeasures of Market ConcentrationIrwin/McGraw-HillCopyright 2001 by The McGraw-Hill Companies, Inc. All rightsreserved.

Market Capitalization ofDeveloped Countries Almost 90% of the total market capitalization ofthe world’s equity markets is accounted for by themarket capitalization of the developed world.Irwin/McGraw-HillCopyright 2001 by The McGraw-Hill Companies, Inc. All rightsreserved.

Market Capitalization ofDeveloping Countries The other 10% is accounted for by the marketcapitalization of developing countries in“emerging markets”. Latin AmericaAsiaEastern EuropeMideast/AfricaRecently the growth rates in these emergingmarkets have been strong, but with more volatilitythan we have here at home.Irwin/McGraw-HillCopyright 2001 by The McGraw-Hill Companies, Inc. All rightsreserved.

Measures of Liquidity The equity markets of the developed world tend tobe much more liquid than emerging markets. Liquidity refers to how quickly an asset can be soldwithout a major price concession.So, while investments in emerging markets maybe profitable, the focus should be on the longterm.Irwin/McGraw-HillCopyright 2001 by The McGraw-Hill Companies, Inc. All rightsreserved.

Measures of Market Concentration Emerging Markets tend to be much moreconcentrated than our markets. Concentrated in relatively few companies.That is, a few issues account for a much largerpercentage of the overall market capitalization inemerging markets than in the equity markets ofthe developed world.Irwin/McGraw-HillCopyright 2001 by The McGraw-Hill Companies, Inc. All rightsreserved.

Market Structure,Trading Practices, and Costs Primary Markets Shares offered for sale directly from the issuingcompany.Secondary Markets Provide market participants with marketability andshare valuation.Irwin/McGraw-HillCopyright 2001 by The McGraw-Hill Companies, Inc. All rightsreserved.

Market Structure,Trading Practices, and Costs Market Order Limit Order An order to your broker to buy or sell shareimmediately at the market price.An order to your broker to buy or sell at the at a priceyou want, when and if he can.If immediate execution is more important than theprice, use a market order.Irwin/McGraw-HillCopyright 2001 by The McGraw-Hill Companies, Inc. All rightsreserved.

Market Structure,Trading Practices, and Costs Dealer Market Auction Market The stock is sold by dealers, who stand ready to buyand sell the security for their own account.In the U.S., the OTC market is a dealer market.Organized exchanges have specialists who match buyand sell orders. Buy and sell orders may get matchedwithout the specialist buying and selling as a dealer.Automated Exchanges Computers match buy and sell orders.Irwin/McGraw-HillCopyright 2001 by The McGraw-Hill Companies, Inc. All rightsreserved.

International Equity MarketBenchmarks North AmericaEuropeAsia/Pacific RimIrwin/McGraw-HillCopyright 2001 by The McGraw-Hill Companies, Inc. All rightsreserved.

North American Equity MarketBenchmarksIrwin/McGraw-HillCopyright 2001 by The McGraw-Hill Companies, Inc. All rightsreserved.

European Equity Market BenchmarksIrwin/McGraw-HillCopyright 2001 by The McGraw-Hill Companies, Inc. All rightsreserved.

Asia/ Pacific Rim Equity MarketBenchmarksIrwin/McGraw-HillCopyright 2001 by The McGraw-Hill Companies, Inc. All rightsreserved.

World Equity Benchmark Shares World Equity Benchmark Shares (WEBS) Country-specific baskets of stocks designed to replicatethe country indexes of 14 countries.WEBS are subject to U.S. SEC and IRS diversificationrequirements.Low cost, convenient way for investors to holddiversified investments in several different countries.Irwin/McGraw-HillCopyright 2001 by The McGraw-Hill Companies, Inc. All rightsreserved.

Trading in International Equities Magnitude of International Equity TradingCross-Listing of SharesYankee Stock OfferingsThe European Stock MarketAmerican Depository ReceiptsIrwin/McGraw-HillCopyright 2001 by The McGraw-Hill Companies, Inc. All rightsreserved.

Magnitude of InternationalEquity TradingDuring the 1980s world capital markets began atrend toward greater global integration.Diversification, reduced regulation, improvementsin computer and communications technology,increased demand from MNCs for globalissuance.Irwin/McGraw-HillCopyright 2001 by The McGraw-Hill Companies, Inc. All rightsreserved.

Cross-Listing of Shares Cross-Listing refers to a firm having its equityshares listed on one or more foreign exchanges.The number of firms doing this has exploded inrecent years.Irwin/McGraw-HillCopyright 2001 by The McGraw-Hill Companies, Inc. All rightsreserved.

Advantages of Cross-Listing It expands the investor base for a firm.Establishes name recognition for the firm in newcapital markets, paving the way for new issues.May offer marketing advantages.May mitigate possibility of hostile takeovers.Irwin/McGraw-HillCopyright 2001 by The McGraw-Hill Companies, Inc. All rightsreserved.

Yankee Stock Offerings The direct sale of new equity capital to U.S.public investors by foreign firms. Privatization in South America and Eastern EuropeEquity sales by Mexican firms trying to cash in onNAFTAIrwin/McGraw-HillCopyright 2001 by The McGraw-Hill Companies, Inc. All rightsreserved.

The European Stock Market EASDAQ is a sort of a European NASDAQ thatbinds together national exchanges.UK, Germany, France, Switzerland, Austria, Italy,Belgium, Denmark, Portugal, Finland, Greece,Luxembourg, and the Netherlands.All trading is denominated in the euro.Irwin/McGraw-HillCopyright 2001 by The McGraw-Hill Companies, Inc. All rightsreserved.

American Depository Receipts Foreign stocks often trade on U.S. exchanges asADRs.It is a receipt that represents the number of foreignshares that are deposited at a U.S. bank.The bank serves as a transfer agent for the ADRsIrwin/McGraw-HillCopyright 2001 by The McGraw-Hill Companies, Inc. All rightsreserved.

American Depository Receipts There are many advantages to trading ADRs asopposed to direct investment in the company’sshares: ADRs are denominated in U.S. dollars, trade on U.S.exchanges and can be bought through any broker.Dividends are paid in U.S. dollars.Most underlying stocks are bearer securities, the ADRsare registered.Irwin/McGraw-HillCopyright 2001 by The McGraw-Hill Companies, Inc. All rightsreserved.

Factors InternationalAffecting EquityFactors AffectingInternationalEquity ReturnsReturns Macroeconomic FactorsExchange RatesIndustrial StructureIrwin/McGraw-HillCopyright 2001 by The McGraw-Hill Companies, Inc. All rightsreserved.

Macroeconomic Factors AffectingInternational Equity Returns The data do not support the notion that equityreturns are strongly influenced by macro factors.That is correspondent with findings for U.S.equity markets.Irwin/McGraw-HillCopyright 2001 by The McGraw-Hill Companies, Inc. All rightsreserved.

Exchange Rates Exchange rate movements in a given countryappear to reinforce the stock market movementswithin that country.One should be careful not to confuse correlationwith causality.Irwin/McGraw-HillCopyright 2001 by The McGraw-Hill Companies, Inc. All rightsreserved.

Industrial Structure Studies examining the influence of industrialstructure on foreign equity returns areinconclusive.Irwin/McGraw-HillCopyright 2001 by The McGraw-Hill Companies, Inc. All rightsreserved.

End Chapter EightIrwin/McGraw-HillCopyright 2001 by The McGraw-Hill Companies, Inc. All rightsreserved.

INTERNATIONAL FINANCIAL MANAGEMENT EUN / RESNICK Second Edition International Equity Chapter Eight 8 Markets Chapter Objective: This chapter discusses both the primary and secondary equity markets throughout the world.

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