EMERGING FINANCIAL MARKETS - NYU



***VERY PRELIMINARY SYLLABUS***

***SUBJECT TO CHANGE***

NEW YORK UNIVERSITY

STERN SCHOOL OF BUSINESS

TOPICS IN EMERGING FINANCIAL MARKETS

C15.0023

Spring 2008

Gayle DeLong Brian C. Gendreau

gdelong@stern.nyu.edu bgendrea@stern.nyu.edu

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The course covers essential elements of investing and trading securities in emerging financial markets. The main perspective is that of the investment manager, but the course will also provide insights into key macro-economic policy debates in the emerging markets. The objective of the course is to equip students with strong theoretical and practical knowledge about financial markets in developing countries.

Prerequisites :

Financial Management (C15.0007) or senior standing.

Course requirements:

Textbook for the course is Emerging Financial Markets by David O. Beim and Charles W. Calomiris (McGraw-Hill/Irwin, 2001). The textbook will be heavily supplemented by articles available on the website for the course and by handouts in the classroom.

Interested students are also referred to (i) Global Bargain Hunting by Malkiel and Mei; (ii) Mobius on Emerging Markets by Mark Mobius; (iii) Profiting from Emerging Market Stocks by Mitchell Posner; and (iv) Managing Emerging Market Portfolios edited by John W. Peavy III for AIMR and Center for Emerging Markets, Research Foundation of the ICFA.

There will be a midterm (50%) and a final examination (50%) – both open-book. In addition, there will be non-graded problem sets distributed on a regular basis throughout the semester. The final exam will not be cumulative, but will presume mastery of the conceptual knowledge from the first half of the semester. Class participation is not graded, but is actively encouraged. Office hours are by request.

Lectures

I. Overview.

Opportunities and risks of investing in emerging markets. Differences between emerging and developed financial markets. A broad introduction to emerging markets assets. An introduction to hindsight and survivorship biases and to “peso problems.”

Beim and Calomiris (BC) Chapter 1.

Optional:

Geert Bakaert, Claude B. Erb, Campbell Harvey, and Tadas E. Viskanta, “What Matters for Emerging Market Investment,” Emerging Markets Quarterly (1997) 1:2, pp. 17-46.

Moses Naim, “Fads and Fashion in Economic Reform: Washington Consensus or Washington Confusion?” Working Draft of a Paper Prepared for the IMF Conference on Second Generation Reforms, Washington, D.C., October 26, 1999.

Richard Levich, “The Importance of Emerging Capital Markets,” Stern School of Business, NYU (March 1, 2001).

Keith Sill, “Understanding Asset Value: Stock Prices, Exchange Rates, and the “Peso Problem,” Federal Reserve Bank of Philadelphia Business Review (September/October 2000).

II. Emerging Equity Markets

Emerging market benchmarks. Measuring portfolio performance. The sources of predictability in emerging market equity returns. Country allocation strategies: value, momentum, and risk factors. The informative content of fund flows. Stock selection. Balanced portfolios: stocks and bonds.

A. Emerging market benchmarks

George R. Hoguet, “Benchmark Blues: Agency Problems in the Construction of Global Emerging Market Benchmarks and the Allocation of Global Capital,” State Street Global Advisors Essays and Presentations (May 21, 2001).

B. Country allocation

Magnus Dahlquist and Campbell Harvey, “Global Tactical Asset Allocation,” Emerging Markets Quarterly (2001).

Brian Gendreau and Leila Heckman, Emerging Market Equity Allocator, Salomon Smith Barney (October 2002).

C. Fund flows and equity returns

Brian C. Gendreau and Leila Heckman, Flowing My Way? Using Mutual Fund Data in International Asset Allocation, Salomon Smith Barney (November 30, 1999).

Brian C. Gendreau and Leila Heckman, Running with the Bulls: Using Information on Emerging Market Mutual Funds’ Holdings in Asset Allocation, Salomon Smith Barney (January 25, 2002).

D. Stock selection

Sandeep A. Patel, “The Cross-sectional Variation in Emerging Market Equity Returns, Emerging Markets Quarterly (1998).

Sandeep A. Patel, “Characteristics-Based Premia in Emerging Markets:

Sector-Neutrality, Cycles and Cross-Market Correlations” (February 1999).

Optional:

Jaap van der Hart, Erica Slagter, and Dick van Dyjk, Stock Selection Strategies in the Emerging Markets, Tinbergen Institute Discussion Paper (TI 2001 – 009/4).

E. Balanced portfolios

Brian C. Gendreau and Leila Heckman, “Sovereign Spreads and Emerging Markets Equity Returns,” Journal of Portfolio Management (forthcoming).

Brian C. Gendreau and Leila Heckman, Sovereign Spreads, Crises, and Emerging Market Equities, Salomon Smith Barney (September 10, 2001).

III. Financial Crises in the Emerging Markets

Fixed vs. floating exchange rate regimes. A review of the recurrent currency and banking crises in the emerging markets between 1994 and 2001, with special emphasis on the Asian financial crisis. An examination of the roles of moral hazard, carry trades, contagion, and the lack of transparency in fomenting and propagating financial crises. Implications of crises for equity investors. Re-modeling the financial architecture: Bail-outs, bail-ins, and debt forgiveness.

A. Currency regimes

Beim and Calomiris, Chapter 6, especially pp. 240-243.

Optional:

Francesso Caramazza and Jahangir Aziz, “Fixed or Flexible? Getting the Exchange Rate Right in the 1990s,” IMF Economic Issues No. 13 (April 17, 1998).

Economist Global Agenda, “No Right Answer? (January 21, 2002).

Jeffrey A. Frankel, “No Single Currency Regime is Right for All Countries or at All Times,” NBER Working Paper No. 7338 (September 1999).

B. Financial crises

Beim and Calomiris, Chapter 8 (glance through Chapter 7).

Optional:

IMF report on International Capital Markets: Developments, Prospects, and Key Policy Issues, by a staff team led by Charles Adams, Donald J. Mathieson, Garry Schinasi, and Bankim Chadha (September 1998). Chapter 2. Pp 11-40, boxes 2.8 to 2.11, 147-151.

Rudiger Dornbusch, “A Primer on Emerging Market Crises,” MIT (January 2001).

Rudiger Dornbusch, Yung Chul Park, and Stijn Claessens, “Understanding How Contagion Spreads,” World Bank Research Observer Vol 15, No. 2 (August 2000).

Kaminsky, Graciela, Saul Lizondo and Carmen M. Reinhart, “Leading Indicators of Currency Crises,” IMF Working Paper ( July 1997) pp 1-21.

Atish Ghosh, Timothy Lane, Marianne Schulze-Ghattas, Ales Bulir, Javier Hamann, and Alex Mourmouras, “IMF Supported Programs in Capital Account Crises,” IMF Occasional Paper 210 (2002).

Paul Blustein, The Chastening: Inside the Crisis that Rocked the Global Financial System and Humbled the IMF (New York: PublicAffairs, 2001)

C. Implications for investors

Patel, Sandeep A. and Asani Sarkar, “Stock Market Crises in Developed and Emerging Markets,” Financial Analysts Journal (November/December 1998).

D. Policy prescriptions

IMF report on International Capital Markets: Developments, Prospects, and Key Policy Issues, . Chapters 1, 3, and 6. pp 59-81.

IV. Sovereign Risk

An examination of the various dimensions of sovereign credit risk, including default, repudiation, nationalization, and capital controls. A look at the issues involved in liberalizing the capital account.

Barry Eichengreen, Michael Mussa, Giovanni Dell’Aricca, Enrica Detogiache, Gian Maria Milesi-Feretti, and Andrew Tweedie,” Liberalizing Capital Movements: Some Analytical Issues,” IMF Economic Issues (February 1999).

Optional:

Dani Rodrik and Eathan Kaplan, “Did the Malaysian Capital Controls Work?” Harvard Univerisity (February 2001).

V. Emerging Market Currency Markets

VI. Fixed Income in the Emerging Markets

A look at developing country debt markets: Brady bonds, Global Bonds, and local currency fixed income instruments. Bonds versus bank loans. The debt restructuring process. Credit rationing.

Sharon Y. Lee and Michael E. Venezia, A Primer on Brady Bonds, Salomon Smith Barney, March 9, 2000.

VII. Corporate Governance

A review of the sources of governance problems, including asymmetric information, adverse selection, and the difficulties investors have in monitoring firms’ managers. An examination of models of corporate governance.

Beim and Calomiris, Chapter 5.

Optional:

Daniel Kaufman, Aart Kraay, and Pablo Zoido-Lobaton, “Governance Matters,” World Bank Policy Research Paper 2196 (October 1999).

Corporate Governance Develops in Emerging Markets, McKinsey on Finance, Winter 2002, pages 15-18.

“Standard & Poor's Weighs Up Global Corporate Reports,” Euromoney, October 2001, pp. 102-109.

“Annual Reports: More Pages, but Better?” Gretchen Morgenson, New York Times, March 17, 2002.

CalPers Investment Office, “Memo to the Investment Committee on Permissible Country Criteria Review,” February 19,2002.

VIII. Accounting practices

A look at the challenges involved in understanding accounting in the emerging markets.

Apples to Apples, Trevor S. Harris

Accounting Issues, February 10, 1995, Pat McConnell

Researching Non-U.S. Companies, Part I, Vinod B. Bavishi

IX. The Cost of Capital

An examination of the difficulties involved in measuring the cost of capital in the emerging markets, where the historical equity risk premium is negative. Possible solutions: downside risk and regression-based approaches.

Brian Gendreau, “Estimating the Equity Risk Premium in the Emerging Markets,” Salomon Smith Barney (October 2001).

X. Risk Management

A look at pitfalls in the application of standard risk management techniques in the emerging markets. Case study: The role of leverage, volatility, and illiquidity in the collapse of LTCM.

Richard Bookstaber, “Global Risk Management: Are We Missing the Point?” Journal of Portfolio Management (Spring 1997).

Alan J. Laubach, Risk Management – A Practical Guide, RiskMetrics Group, Inc. (January 1999)

Philippe Jorion, “Risk Management Lessons from LTCM,” European Financial Management Journal (2000).

Optional:

Jacques Longerstaey and Martin Spencer, RiskMetrics –Technical Document, RiskMetrics Group, Inc., Fourth Ed., 1996.

XI. Legal infrastructure

An examination of the “rule of law” in the emerging markets, including the protection afforded to shareholders and creditors – foreign as well as domestic.

Beim and Calomiris, Chapter 4.

XII. Emerging markets – is it a good time to invest? Is it ever?

A critical look at the arguments for investing in the emerging markets, including demographics, growth, gains from the adoption of best practices, and the growth of local institutional investors.

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