Vihang Errunza

• B.Sc., B.Sc.(Tech), M.S., Ph.D
• Chair at McGill University

We propose a new measure of financial system diversity inspired from biodiversity research and explore its potential benefits for growth and stability. Our measure captures the relative contributions of various financial system constituents as well as their interrelationships. For a sample of 61 countries, we find that diversity in financial “ecosy...

We explore the valuation, tax and post-merger performance consequences of M&As with tax haven firms. Using an international sample of cross-border mergers over the period 1989 to 2010, we find that acquirers of tax haven firms decrease their effective tax rates significantly in two years following the M&As. The announcement returns to acquirers of...

We develop a new global asset pricing model to study how illiquidity interacts with market segmentation and investability constraints in 42 markets. Noninvestable stocks that can only be held by foreign investors earn higher expected returns compared to freely investable stocks due to limited risk sharing and higher illiquidity. In addition to the...

We find that the degree and dynamics of sovereign bond market integration across 21 developed and 18 emerging countries is significantly heterogeneous. We show that better spanning can significantly enhance market integration through dissipating local risk premiums. Integration of the sovereign bond markets increases by about 10% on average, when a...

We observe significant heterogeneity across countries and maturities in the degree and dynamics of sovereign bond market integration. We analyze the role of credit quality, political and inflation risks, liquidity and investor sentiment in integrating developed and emerging bond markets and show that political risk and credit quality are the domina...

Forecasting the evolution of security co-movements is critical for asset pricing and portfolio allocation. Hence, we investigate patterns and trends in correlations over time using weekly returns for developed markets (DMs) and emerging markets (EMs) over the period 1973–2012. We show that it is possible to model co-movements for many countries sim...

We investigate the impact of currency factor on market integration. We compare integration indices estimated from international asset pricing models with and without real exchange risk. The theoretical expectation implies the integration measures should be similar when global currency premium and the sum of global and local currency premiums are sm...

We examine time varying integration of developed (DM) and emerging (EM) market government bonds. Although we find an upward trend for most countries and maturity bands, we do observe reversals and negative trends among both DMs and EMs and for some maturities during the financial crisis. We examine potential factors that could explain the integrati...

We examine the role of emerging markets in providing currency diversification benefits. We use global sectoral portfolios for developed and emerging markets. Our empirical tests based on a conditional international asset pricing model show that on average the prices of currency risks are very close to zero but they increase significantly during cri...

Market liberalization may not result in full market integration if implicit barriers are important. We test this proposition for investable and non-investable segments of 22 emerging markets (EMs). We also measure the degree of integration for six major developed markets (DMs) as a meaningful benchmark. We find that while the DMs are close to fully...

We explore the valuation consequences of tax avoidance. Using an international sample of cross-border mergers that involve tax haven targets and/or acquirers over the period 1989 to 2010, we find that the announcement returns to targets and acquirers of tax haven firms are lower relative to a control sample of non-tax motivated M&As. The evidence i...

International equity markets are characterized by nonlinear dependence and asymmetries. We propose a new dynamic asymmetric copula model to capture long-run and short-run dependence, multivariate nonnormality, and asymmetries in large cross-sections. We find that copula correlations have increased markedly in both developed markets (DMs) and emergi...

We study the dynamics of gains from sectoral diversification vis-à-vis geographic diversification over the period of 1990-2001, and the economic sources that could be behind the potential changes in those gains. We estimate pairwise conditional correlations between returns on the U.S. equity market and returns on the equity markets of 16 other OECD...

Recent studies show that the transfer of corporate governance structure across borders has significant valuation consequences. It is equally important to consider the valuation effect of state expropriation risk as well as its interaction with quality of corporate governance. In this paper, we investigate two related issues. First, what is the valu...

Recent studies show that the transfer of corporate governance structure across borders has significant valuation consequences. It is equally important to consider the valuation effect of state expropriation risk as well as its interaction with quality of corporate governance. Using a sample of cross-border acquisitions during 1989-2009, we find tha...

This paper provides a theoretical and empirical analysis of country funds focusing on emerging economies whose capital markets are not readily accessible to outside investors. We study country fund pricing and the associated policy implications under alternative variations of international market structure segmentation. We show that country funds t...

Market liberalization may not result in full market integration if implicit barriers are important. We test this proposition for investable and non-investable segments of twenty-two emerging markets (EMs). We also measure the degree of integration for six major developed markets (DMs) as a meaningful benchmark. We find that while the DMs are close...

Using a sample of 902 cross-border acquisitions from 36 target countries during the period from 1989 to 2009, we find that targets, which operate under state expropriation risk, receive a significantly lower premium. We also show that the exogenous shocks to corporate governance are valued differently in the presence of state expropriation. Without...

We propose an international asset pricing model in a two-country framework where trading in the foreign market encounters barriers to portfolio flows and short-sale constraints. Under ownership restrictions, free assets are priced with a global risk premium whereas the restricted assets command a global risk premium, a conditional risk premium and...

Market liberalization may not result in global pricing or full market integration if implicit barriers are important. We use the conditional version of the Errunza and Losq (1985) model to estimate pricing of investable indices for 22 emerging markets and test this proposition. Our results show that local factors are priced and the implicit barrier...

Since understanding and quantifying the evolution of security co-movements is critical for asset pricing and portfolio allocation, we investigate patterns and trends in correlations over time using weekly returns for large systems of developed markets (DMs) and emerging markets (EMs) during the period 1973-2009. We use the DECO, DCC, and BEKK corre...

In countries with secure property rights, corporate transparency improves investment efficiency and increases growth by alleviating information asymmetry. However, in countries with insecure property rights, greater transparency can increase the risk of government expropriation. Therefore some firms that would benefit most from transparency cannot...

Academics and practitioners implicitly assume that investable emerging market securities are priced in the global context. However the removal of explicit barriers may not necessarily result in increased market integration if implicit barriers are also important. To test this proposition, we use the conditional version of the Chaieb and Errunza (20...

We investigate whether cross-country diversification, particularly into emerging markets, has an impact on the pricing of exchange risk for globally diversified portfolios. Our empirical tests based on a conditional IAPM show that the price of exchange risk is highly significant in global sector portfolios that include only developed countries. In...

Roll (1992) suggests that industrial composition explains substantial cross-country variation in stock market returns. We observe an increasing convergence in the industrial structure between the U.S. and 16 other OECD countries and then examine its implications on co-movements in global equity markets and countries' real output. We find that the a...

The US economy is arguably following an unsustainable trajectory. The main indicators of this are a large current account deficit, a large federal budget deficit and trend-wise increasing costs of Social Security and Medicare. In this chapter, we will discuss these observations and to what extent the financial and economic crisis may have changed t...

We attempt to answer the following questions: What are the revaluation effects and the impact on performance, volatility, and return correlation from stock market liberalization in emerging markets? These questions have been studied extensively at the market level but not at the firm level. Our results show significantly different impact of stock m...

We provide new evidence on the pricing of local risk factors in emerging stock markets. We investigate whether there is a significant local currency premium together with a domestic market risk premium in equity returns within a partial integration asset pricing model. Given previous evidence on currency risk, we conduct empirical tests in a condit...

We study the dynamics of gains from sectoral versus geographic diversification and relate economic sources to changes in those gains. We estimate conditional correlations between returns on the U.S. equity market and 16 equity markets and 10 local industries from other OECD countries and find that the average correlation across countries has increa...

We develop a three-moment international asset-pricing model (TM-IAPM) that prices coskewness and embeds the standard IAPMs as special cases. We use the model to investigate the time-series behavior of market, size, value, and momentum premiums in the United States, Japan, and the United Kingdom equity markets. We find that the model explains most o...

We study privatization under moral hazard and adverse selection. We show that if the fraction of efficient investors is either insignificant or productivity differences between efficient and inefficient investors are negligible, the government would offer a pooling contract and sell the same fraction of equity to both types of investors. The lower...

"We extend Campbell's (1993) model to develop an intertemporal international asset pricing model (IAPM). We show that the expected international asset return is determined by a weighted average of market risk, market hedging risk, exchange rate risk and exchange rate hedging risk. These weights sum up to one. Our model explicitl...

This paper provides new evidence on the pricing of exchange risk in global stock markets. We conduct empirical tests in a conditional setting with a multivariate GARCH-in-Mean specification and time-varying prices of risk for the US and nine emerging markets to determine whether exchange risk is priced under alternative model specifications and exc...

We provide new evidence on the pricing of exchange risk in the global stock markets. We conduct empirical tests in a conditional setting for ten developed markets and twelve emerging markets to determine whether emerging market currency risk affects emerging market equities and if it spills over into developed markets. In addition to using real exc...

Traditionally, integration has been studied at the country level. With increasing economic integration, industrial reorganization, and blurring of national boundaries (e.g., EU), it is important to investigate global integration at the industry level. We argue that country-level integration (segmentation) does not preclude industry-level segmentati...

This paper examines the shareholder wealth effects associated with global equity offerings made by foreign firms after their initial cross-listing in the United States. We document that the market reaction to seasoned global equity offerings is economically and statistically insignificant. However, it is 1.5% larger than the market reaction to offe...

International asset pricing models suggest that barriers to portfolio flows and availability of market substitutes affect the degree and time variation of world market integration. We construct diversification portfolios for eight emerging markets over the period 1976-2000, use GARCH-M methodology to estimate the Errunza-Losq model and empirically...

This paper investigates the valuation effects of corporate international diversification by examining cross-border mergers and acquisitions of US acquirers over the period 1990–2000. We find that, on average, acquisitions of “fairly valued” foreign business units do not lead to value discounts. In contrast, unrelated cross-border acquisitions resul...

Tech, and the FMA-2002 meeting for comments and suggestions. Sarkissian acknowledges financial support from FCAR and IFM2. ABSTRACT Using a broad sample of 1298 overseas listings spanning most world markets, we examine the long-run times-series and cross-sectional behavior of returns for firms choosing to list in foreign markets. Over an extended e...

We attempt to answer the following questions: What are the revaluation effects and the impact on performance, volatility, and return correlation from stock market liberalization in emerging markets? These questions have been studied extensively at the market-level but not at the firm level. Our results show significantly different impact of stock m...

This paper investigates the valuation effects of corporate international diversification by examining cross-border mergers and acquisitions of US acquirers over the period 1990-2000. We find that, on average, acquisitions of "fairly valued" foreign business units do not lead to value discounts. In contrast, unrelated cross-border acquisitions resul...

This paper studies privatization under moral hazard and adverse selection. We show that under the presence of moral hazard, the optimal financial package of privatization consists of selling 100 per cent equity together with a subsidy on the observed cash flow. Price of the equity reflects the costs of the subsidy. However, in the presence of both...

Reform of local capital markets and relaxation of capital controls to attract foreign portfolio investments (FPIs) has become an integral part of development strategy. The proximity of market openings and large, sudden shifts in international capital flows gave credence to the notion that the liberalization was the primary culprit in precipitating...

In recent years, we have witnessed a significant loss of national welfare from economic crises resulting from the weakness of the global financial system. After analyzing the root causes these crises, we focus on two major fault lines that have characterized most of these occurrences: First, we review the arguments in favor of and against the open...

While theoretical models predict a decrease in the cost of capital from depositary receipt offerings, the economic benefits of this liberalization have been difficult to quantify, Using a sample of 126 firms from 32 countries, we document a significant decline of 42% in the cost of capital. In addition, we show the decline is driven by the ability...

Over half of money fund managers voluntarily waive fees they have a contractual right to claim. Accordingly, the effective fee charged may be substantially less than indicated in expense ratios and may vary over the year despite a constant contractual fee. Retail fund managers use fee waivers to strategically adjust net advisory fees to current rea...

A simple asset pricing model is developed to take into account two important characteristics in global investments: market segmentation and noise trader risk. Our results show the removal of international investment barriers and cross-border listings have not led to a fully integrated international capital market. We also show that different degree...

In recent years, we have witnessed a significant loss of national welfare from economic crises resulting from the weakness of the global financial system. After analyzing the root causes of this experience, we focus on two major fault lines that have characterized most of these occurrences: First, we review the arguments in favor of and against the...

Recent empirical studies have documented the dramatic growth of privatizations globally and the resultant efficiency gains. We develop a theoretical model that incorporates the costs and benefits of privatization as complex options. This framework allows us to (1) highlight the impact of government's overall public sector policies on the potential...

During the last two decades, reform of local capital markets and relaxation of capital controls to attract foreign portfolio investments (FPIs) became an integral part of development strategy. The proximity of market openings and large, sudden shifts in international capital flows gave credence to the notion that the liberalization was the primary...

We examine whether portfolios of domestically traded securities can mimic foreign indices so that investment in assets that trade only abroad is not necessary to exhaust the gains from international diversification. We use monthly data from 1976 to 1993 for seven developed and nine emerging markets. Return correlations, mean-variance spanning, and...

In this paper we investigate whether macroeconomic variability can explain time variation in European stock market volatility. We ...nd that unlike the documented case of the U.S., in many cases, the time variation in stock market volatility is found to be signi...cantly aected by the past variability of either monetary or real macroecomic factors....

We examine the shareholder wealth effects associated with 97 global equity offerings made by foreign firms in the United States. Although on average these global offerings are not associated with a negative stock price response, firms located in emerging markets have negative abnormal returns while those located in developed markets have positive a...

While theoretical models predict a decrease in the cost of capital from depositary receipt offerings, the economic benefits of this liberalization have been difficult to quantify. Using a sample of 126 firms from 32 countries and a size and country matched control sample, we document a statistically and economically significant decline in returns o...

Closed-end national index funds (NIFs of country funds) invest primarily in the stocks of the originating countries, such as Brazil, India, and the Republic of Korea. They are typically traded in the organized exchanges of industrial countries, such as the United States and the United Kingdom. Although NIFs have not raised large amounts of external...

The authors theoretically analyze country funds, focusing on emerging economies in which capital markets are not readily accessible to outside investors. They study country-fund pricing and the associated policy implications under alternative variations on segmentation of international markets. They show that country funds traded in the developed c...

Business cycles in different regions of the United States tend to synchronize. This study investigates the reasons behind this synchronization of business cycles and the consequent formation of a national business cycle. Trade between regions may not be strong enough for one region to "drive" business cycle fluctuations in another region. This stud...

This article investigates the pricing behavior of national index funds (NIFs). Under barriers to capital flows in an otherwise perfect capital market, the familiar result of zero premium/discount obtains. The more realistic assumption of imperfect cross-border arbitrage suggests that in a two country setting the NIFs will sell at a premium. In a mu...

This paper analyzes LDC debt-for-equity swaps under a rational expectations equilibrium. Under full information, the swap can never be strictly preferred by the LDC, the MNC, and the bank. Under the postulated informational asymmetry assumptions the same results obtain, leading to the "lemons" market in reverse. Under rational expectations, the swa...

This paper analyzes LDC debt‐for‐equity swaps under a rational expectations equilibrium. Under full information, the swap can never be strictly preferred by the LDC, the MNC, and the bank. Under the postulated informational asymmetry assumptions the same results obtain, leading to the “lemons” market in reverse. Under rational expectations, the swa...

This paper investigates the impact of capital flow restrictions on the pricing of securities, on the optimal portfolio compositions of investors of different nationalities, and on their welfare. Under capital flow controls, the equilibrium price of a security is determined jointly by its international and national risk premiums, and investors acqui...

A discriminant model for evaluation of loan applicants by bank managers should be capable of handling a wide variety of data in a parsimonious manner. Frequently the data will be discrete, and not easily converted to continuous form. Furthermore, missing data may be a problem. This paper examines the use of a discrete discriminant analytic techniqu...

The net buying (selling) volume of the most net buyer (seller) brokers over a unit period is a widely followed piece of information in Istanbul Stock Market, which most market commentaries inaccurately refer to as “the net money in- or outflow”. It is, in fact, a proxy for big investors’ trading. In this note, we test whether this information has p...

This paper conducts a theoretical and empirical investigation of the pricing (and portfolio) implications of investment barriers in the context of international capital markets. The postulated market structure—labelled “mildly segmented”—leads to the existence of “super” risk premiums for a subset of securities and to a breakdown of the standard se...

Respectively, Associate Professor, Faculty of Management, McGill University and Dickson-Bascom Professor, Graduate School of Business, University of Wisconsin-Madison.

Discriminant analysis is applied to distinguish non-defaulted and defaulted loans in a practical context at the Agricultural and Cattle development bank in El Salvador. The results suggest that implementation of such a model will reduce administration costs and lower default rates.

We wish to acknowledge helpful comments from E. Eugene Carter and M. Yalovsky, and computing assistance from Chong Kwa and Prasad Padmanabhan. This research was financially supported by the Wisconsin Alumni Research Foundation and McGill Faculty of Graduate Study and Research.

Recent studies suggest that the main avenue to obtain benefits of international portfolio diversification would be direct portfolio investments in the domestic securities of the various countries. There are many barriers to such investments, the most important being the nature of foreign capital markets. Given the potential for attracting foreign p...

This articles studies the historical financial sources for MNC activity in Costa Rica, Honduras, and Nicaragua. The evidence suggests that country environment factors have dominated the sourcing policies of MNCs. The most important factors include perceived exchange risk and domestic credit conditions.© 1979 JIBS. Journal of International Business...

Given the nature of James Bicksler's comment, it would be appropriate first to review briefly the most important works in the area of international portfolio investments.© 1978 JIBS. Journal of International Business Studies (1978) 9, 117–123

The paper substantiates the intuitive argument for international portfolio diversification—diversification that is not limited to the developed markets, but also includes the corporate securities of less developed countries (LDCs). Such diversification, in light of all the available evidence, appears to be desirable from the standpoint of the inves...

In this study, we identify waves in cross listing activity at the host market, home market, and industry level and find them to be positively correlated with relative financial and economic market performance. We use these waves to increase the power of tests on the valuation gains to cross listing based on the assertion that periods of foreign lis...