Daniel is incorrect. Although VAR measures left-tail risk, the analytical method (also known as the variance-covariance or delta normal method) for estimating VAR requires the assumption of a normal distribution. This is because the analytical method utilizes the standard deviation of returns. For example, in calculating a daily VAR we calculate the standard deviation of daily returns in the past and assume it will be applicable to the future. Then using the assets expected one-day return and standard deviation, we estimate the one-day VAR at the desired level of significance. The assumption of normality is problematic because it is well documented that returns are not normally distributed in emerging markets.

Shrum is correct. Emerging market data often contain structural breaks (e.g., when liberalizations occur, the pattern of stock returns dramatically changes). If a country is expected to undergo a structural change in the future, then historical data are not very useful for prediction.

Daniel is incorrect. Although VAR measures left-tail risk, the analytical method (also known as the variance-covariance or delta normal method) for estimating VAR requires the assumption of a normal distribution. This is because the analytical method utilizes the standard deviation of returns. For example, in calculating a daily VAR we calculate the standard deviation of daily returns in the past and assume it will be applicable to the future. Then using the assets expected one-day return and standard deviation, we estimate the one-day VAR at the desired level of significance. The assumption of normality is problematic because it is well documented that returns are not normally distributed in emerging markets.

Shrum is correct. Emerging market data often contain structural breaks (e.g., when liberalizations occur, the pattern of stock returns dramatically changes). If a country is expected to undergo a structural change in the future, then historical data are not very useful for prediction.

Daniel is incorrect. Although VAR measures left-tail risk, the analytical method (also known as the variance-covariance or delta normal method) for estimating VAR requires the assumption of a normal distribution. This is because the analytical method utilizes the standard deviation of returns. For example, in calculating a daily VAR we calculate the standard deviation of daily returns in the past and assume it will be applicable to the future. Then using the assets expected one-day return and standard deviation, we estimate the one-day VAR at the desired level of significance. The assumption of normality is problematic because it is well documented that returns are not normally distributed in emerging markets.

Shrum is correct. Emerging market data often contain structural breaks (e.g., when liberalizations occur, the pattern of stock returns dramatically changes). If a country is expected to undergo a structural change in the future, then historical data are not very useful for prediction.

Daniel is incorrect. In emerging markets, there is evidence that extreme negative movements in one market coincide with the same in others, which most investors think of as contagion. However, the mere presence of increased correlations between markets during crisis periods does not suffice as evidence of contagion because correlations increase as volatility increases due simply to the statistical properties of the correlation measure.

Shrum is incorrect. Although liberalization may positively impact return variability if greater information flow results in increases in speculative capital flows, the empirical evidence demonstrates that liberalization does not affect the volatility of returns. Over the long run after liberalization, return variability should decline as the economy matures.

Daniel is incorrect. In emerging markets, there is evidence that extreme negative movements in one market coincide with the same in others, which most investors think of as contagion. However, the mere presence of increased correlations between markets during crisis periods does not suffice as evidence of contagion because correlations increase as volatility increases due simply to the statistical properties of the correlation measure.

Shrum is incorrect. Although liberalization may positively impact return variability if greater information flow results in increases in speculative capital flows, the empirical evidence demonstrates that liberalization does not affect the volatility of returns. Over the long run after liberalization, return variability should decline as the economy matures.

Daniel is incorrect. In emerging markets, there is evidence that extreme negative movements in one market coincide with the same in others, which most investors think of as contagion. However, the mere presence of increased correlations between markets during crisis periods does not suffice as evidence of contagion because correlations increase as volatility increases due simply to the statistical properties of the correlation measure.

Shrum is incorrect. Although liberalization may positively impact return variability if greater information flow results in increases in speculative capital flows, the empirical evidence demonstrates that liberalization does not affect the volatility of returns. Over the long run after liberalization, return variability should decline as the economy matures.

When an emerging country becomes liberalized, its cost of capital falls, trade and exports increase, and inflation decreases. Additionally, government debt should decrease and economic growth should expand, so government debt to GDP should decline. Country B is the only country of the four that demonstrates these changes after liberalization.
  

Daniel is correct. Emerging market firms with weaker corporate governance are more likely to suffer during crises.

Shrum is correct. Corporate governance can be improved in emerging countries when analyst coverage increases. This improves firm valuation, especially when the firm is controlled by family and management and when the firm is from a country with poor shareholder rights. In these instances there is greater opportunity for improvement in corporate governance.

Daniel is correct. Emerging market firms with weaker corporate governance are more likely to suffer during crises.

Shrum is correct. Corporate governance can be improved in emerging countries when analyst coverage increases. This improves firm valuation, especially when the firm is controlled by family and management and when the firm is from a country with poor shareholder rights. In these instances there is greater opportunity for improvement in corporate governance.

Daniel is correct. Emerging market firms with weaker corporate governance are more likely to suffer during crises.

Shrum is correct. Corporate governance can be improved in emerging countries when analyst coverage increases. This improves firm valuation, especially when the firm is controlled by family and management and when the firm is from a country with poor shareholder rights. In these instances there is greater opportunity for improvement in corporate governance.

To hedge the currency risk of the WP stock position, they should buy puts in the amount of WP 10,000,000 × 1/0.3 = WP 33,333,333.33. The put gives them the right to sell WP. With WP 31,250 in one contract, they should buy WP 33,333,333.33/31,250 = 1,067 WP puts.
  

Market liberalization does not guarantee the existence of market integration and vice versa. A market can be somewhat integrated (e.g., its stocks are available via closed end mutual funds) without the government pursuing liberalization. A government can pursue liberalization but its stocks might not be freely traded due to impediments in trading.

Liberalization may positively impact return variability if greater information flow results in greater return reactivity or if speculative capital flows increase. On the other hand, there should not be as much deviation from fundamental value, so return variability may decline. The empirical evidence, however, demonstrates that liberalization does not affect the volatility of returns. Over the long run, return variability should decline as the economy matures.

Liberalization results in initially increased capital flows into a developing country. The presence of reduced dividend yields in developing countries after liberalization suggests that the reduction in the cost of capital is permanent.