Which of the following best characterizes return patterns in emerging markets? The returns are:
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Emerging market returns are not normally distributed. Emerging market return 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.
Which of the following best characterizes the relationship between privatizations, returns, and the cost of capital in emerging countries? Privatizations result in:
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When firms that were formerly government owned are privatized, the government signals its intent to reduce its interference in the economy and investors become more willing to invest in risky assets. Privatizations also increase investment opportunities which allows for better performing portfolios, which also increases investors willingness to hold risky assets. Hence the expected returns and cost of capital fall for firms in the economy.
Which of the following best characterizes the effect of liberalization on market microstructure in emerging markets? Liquidity:
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The effect of liberalization is to increase liquidity and volume. However, bid-ask spreads increase possibly because new, less experienced foreign investors are exploited by the local dealers.
Which of the following are most closely and directly associated with lower costs of capital in emerging countries?
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When an emerging country announces a liberalization program, equity prices will increase. The rise in equity prices will result in lower expected returns and a lower cost of capital for emerging firms. When firms that were formerly government owned are privatized, the government signals its intent to reduce its interference in the economy and investors become more willing to invest in risky assets. Privatizations also increase investment opportunities which allows for better performing portfolios, which also increases investors willingness to hold risky assets. Hence the expected returns and cost of capital fall in the economy.
When an emerging country announces a liberalization program, equity prices will increase. The rise in equity prices will result in lower expected returns and a lower cost of capital for emerging firms.
When firms that were formerly government owned are privatized, the government signals its intent to reduce its interference in the economy and investors become more willing to invest in risky assets. Privatizations also increase investment opportunities which allows for better performing portfolios, which also increases investors willingness to hold risky assets. Hence the expected returns and cost of capital fall in the economy.
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