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Housekeeping and plumbing - the investability of emerging markets

  • Ladekarl, Jeppe
  • Zervos, Sara
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    The authors look at the investment allocation process employed by portfolio investors in emerging markets. In particular, they examine the first of a two-stage decision process: first, investors create a subset of countries with investments potential, to be analyzed later in further detail; second, they weigh expected returns versus risk and subsequently allocate their funds. The authors hypothesize that the determination of whether a country has potential investment opportunities, or not is influenced by a number of factors, especially related to size, quality of"housekeeping,"(macroeconomic policies, political economy, local financial markets, corporate governance, and so on), and efficiency of"plumbing"(legal and regulatory framework, custody, clearing and settlement, taxes, and so on). By interviewing many types of these investors in both the United States and the United Kingdom, the authors delve into their decision-making processes, as well as attempt to uncover the factors they indicate, matter most in defining the"investment opportunities"universe. They determine the relative importance of such housekeeping, and plumbing factors while highlighting the role of external issues, such as index benchmarking and U.S. foreign policy. The authors recognize from the outset that the most profound effects on investment flows, or the required minimum expected returns, arise from improvements or deteriorations in macroeconomic policies. However, at the margin, improvements can be made in country policies that will, for a given macroeconomic situation, improve the ability of a country to attract international investment flows.

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    Paper provided by The World Bank in its series Policy Research Working Paper Series with number 3229.

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    Date of creation: 01 Mar 2004
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    Handle: RePEc:wbk:wbrwps:3229
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    1. Bohn, Henning & Tesar, Linda L, 1996. "U.S. Equity Investment in Foreign Markets: Portfolio Rebalancing or Return Chasing?," American Economic Review, American Economic Association, vol. 86(2), pages 77-81, May.
    2. Bekaert, Geert, 1995. "Market Integration and Investment Barriers in Emerging Equity Markets," World Bank Economic Review, World Bank Group, vol. 9(1), pages 75-107, January.
    3. Jessica Tjornhom Donohue & Kenneth A. Froot, 2002. "The Persistence of Emerging Market Equity Flows," NBER Working Papers 9241, National Bureau of Economic Research, Inc.
    4. Hyuk Choe & Bong-Chan Kho & Rene M. Stulz, 1998. "Do Foreign Investors Destabilize Stock Markets? The Korean Experience in 1997," NBER Working Papers 6661, National Bureau of Economic Research, Inc.
    5. Geert Bekaert & Campbell R. Harvey, 1994. "Time-Varying World Market Integration," NBER Working Papers 4843, National Bureau of Economic Research, Inc.
    6. Aggarwal, Reena & Klapper, Leora & Wysocki, Peter D., 2005. "Portfolio preferences of foreign institutional investors," Journal of Banking & Finance, Elsevier, vol. 29(12), pages 2919-2946, December.
    7. Shang-Jin Wei & Gaston Gelos, 2002. "Transparency and International Investor Behavior," IMF Working Papers 02/174, International Monetary Fund.
    8. Poonam Gupta & James P. F. Gordon, 2003. "Portfolio Flows Into India; Do Domestic Fundamentals Matter?," IMF Working Papers 03/20, International Monetary Fund.
    9. Kaminsky, Graciela & Lyons, Richard & Schmukler, Sergio, 2001. "Mutual fund investment in emerging markets - an overview," Policy Research Working Paper Series 2529, The World Bank.
    10. Geert Bekaert & Campbell R. Harvey, 1998. "Capital Flows and the Behavior of Emerging Market Equity Returns," NBER Working Papers 6669, National Bureau of Economic Research, Inc.
    11. Brennan, Michael J & Cao, H Henry, 1997. " International Portfolio Investment Flows," Journal of Finance, American Finance Association, vol. 52(5), pages 1851-80, December.
    12. Geert Bekaert & Campbell R. Harvey & Robin L. Lumsdaine, 1999. "The Dynamics of Emerging Market Equity Flows," NBER Working Papers 7219, National Bureau of Economic Research, Inc.
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