The aim of this paper is to survey a wide range of empirical papers on option markets to address the extent to which option markets affect price discovery on the spot market. The theoretical prediction that informed traders should sometimes trade in the option market has been examined empirically by several authors. The existing empirical evidence for such a view, however, is mixed. One group of researchers support the hypothesis that information reflects in option market first and find a significant lead for the option market. Another group of researchers support the hypothesis that information reflects in stock markets first and trading activities in option markets are not significant. Since there is no consensus among the empirical studies on this issue, it leaves us with some open theoretical and empirical issues.
This paper studies the international portfolio diversification benefits in equity investing from the perspective of an American investor in a context of a growing market correlation. Different investment strategies employing different risk measures (standard variance, GARCH variance, CVaR, LPM (n)) are used to assess the robustness of international diversification benefits. Equity returns from 41 countries are used, including developed, emerging and frontier markets, during the period from 1988-2009.Our empirical results show that economic gains from international equity diversification are still substantial despite the growing market correlations. Interestingly, international equity diversification allows obvious reduction of returns variability and minimum loss, and this only for restricted portfolios.We found also that emerging markets continue to be an important component of well-diversified portfolios. A substantial investment in emerging and frontier markets enhances the economic gains of diversified portfolios while it does not seem to reduce portfolio returns variability and minimum loss. However, they consistently improve the risk -based performance measured by the semi variability ratio when we decrease their component in a well diversified portfolio.
PurposeThis paper proposes a new multi-dimensional financial inclusion index.Design/methodology/approachThe authors employ two-stage principal component analysis (PCA) and aggregating indicators of availability, access and use. The paper first assesses the cross-country variations in the index and analyses trends over time for a sample of countries members of the Union for the Mediterranean (UfM) from 2010–2018. Second, it investigates factors that could explain the level of financial inclusion across countries.FindingsThe financial inclusion index shows a downward trend for the full sample over the period under investigation; however when splitting the sample by income group, it appears that high- and middle–income countries did not register the same trend. When examining the determinants of financial inclusion for the UfM countries, the authors find that macroeconomic, social and governance factors, as well as banking conditions, matter. Policy-makers in low- and middle-income economies should consider the importance of digital financial inclusion, which is substituting the role to traditional banking system, to close the gap and accelerate its development.Originality/valueFirst, the authors provide a new measure of financial inclusion using a three-dimensional index: availability, access and use, for which weights are assigned using PCA. It uses data available for the UfM sample by combining data from different databases in order to include most indicators considered in the literature, as the majority of studies only use single measures (number of bank branches, ownership of a bank account, ratio of credits or deposits to gross domestic product [GDP], etc.). Second, by focussing on UfM countries, the study covers a region that includes both large developed and small developing economies that are connected via financial and trade ties, whilst previous studies generally give global evidence from an international sample with little or no economic ties. Third, splitting the sample by country income groups, the paper presents a more comprehensive representation of the cross-country variation in financial inclusion levels between high- and middle-income economies for this region.
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