Sovereign Credit Ratings and Asian Financial Markets
Abstract
Each region/country seeks to become more efficient to gain the confidence of potential investors. Most of the Asian economies are categorized as emerging markets, where the role of financial markets has even become more intensified to provide financial services to increasing economic and financial activities. Asian financial market has momentously suffered during the Asian, and global financial crisis. The mass destruction was mainly caused due to the mounting uncertainty, which spillover throughout the region, where investors lost their confidence. Considering the pivotal economic role of financial markets, and implications evolve due to sovereign credit rating announcements, this study aims to model the role of sovereign credit rating announcements by Standard and Poor’s, and Moody’s on financial market development of the Asian region. For 24 Asian countries/regions, we perform a regression analysis on sovereign credit rating changes based on financial market development index and its factors. The findings of Driscoll Kraay’s robust estimator reveals that improvement in sovereign credit rating score enhances the financial market development in the region. Moreover, we applied several robustness checks, such as alternative estimators, alternative measures, and three sub-dimensions of financial market development. According to the findings from these robustness checks, the positive impact of sovereign credit ratings on financial market development in the region is robust. Unlike prior literature (which is confined to the event study approach), this study utilizes the historical grades to establish the relationship under the standard error clustering approach. Due to the diversity of investors’ speculations, we propose a micro-level extension of the present model to overcome a difference in country policy.
Full text
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DOI: 10.15240/ ul/001/2021-1-011
SOVEREIGN CREDIT RATINGS AND ASIAN
FINANCIAL MARKETS
Khansa Pe aiz1, Zuzana Vi gle o á2, Muhammad Asi Khan3,
Usman Akba 4, Józse Popp5
1 Yanshan Uni e si y, School o Economics and Managemen , China, ORCID: 0000-0002-0474-8433,
[email p o ec ed];
2 Tomas Ba a Uni e si y in Zlín, Facul y o Managemen and Economics, Czech Republic, ORCID: 0000-0002-7957-
9216, [email p o ec ed];
3 Uni e si y o Ko li, Facul y o Managemen Sciences, Depa men o Comme ce, Pakis an, ORCID: 0000-0002-
3563-2951, [email p o ec ed];
4 Yanshan Uni e si y, School o Economics and Managemen , China, ORCID: 0000-0003-2109-546X,
[email p o ec ed];
5 WSB Uni e si y, Depa men o Managemen , Facul y o Applied Sciences, Poland, ORCID: 0000-0003-0848-4591,
[email p o ec ed].
Abs ac : Each egion/coun y seeks o become mo e e icien o gain he con idence o po en ial
in es o s. Mos o he Asian economies a e ca ego ized as eme ging ma ke s, whe e he ole o
inancial ma ke s has e en become mo e in ensi ied o p o ide inancial se ices o inc easing
economic and inancial ac i i ies. Asian inancial ma ke has momen ously su e ed du ing he
Asian, and global inancial c isis. The mass des uc ion was mainly caused due o he moun ing
unce ain y, which spillo e h oughou he egion, whe e in es o s los hei con idence. Conside ing
he pi o al economic ole o inancial ma ke s, and implica ions e ol e due o so e eign c edi
a ing announcemen s, his s udy aims o model he ole o so e eign c edi a ing announcemen s
by S anda d and Poo ’s, and Moody’s on inancial ma ke de elopmen o he Asian egion. Fo
24 Asian coun ies/ egions, we pe o m a eg ession analysis on so e eign c edi a ing changes
based on inancial ma ke de elopmen index and i s ac o s. The indings o D iscoll K aay’s obus
es ima o e eals ha imp o emen in so e eign c edi a ing sco e enhances he inancial ma ke
de elopmen in he egion. Mo eo e , we applied se e al obus ness checks, such as al e na i e
es ima o s, al e na i e measu es, and h ee sub-dimensions o inancial ma ke de elopmen .
Acco ding o he indings om hese obus ness checks, he posi i e impac o so e eign c edi
a ings on inancial ma ke de elopmen in he egion is obus . Unlike p io li e a u e (which is
con ined o he e en s udy app oach), his s udy u ilizes he his o ical g ades o es ablish he
ela ionship unde he s anda d e o clus e ing app oach. Due o he di e si y o in es o s’
specula ions, we p opose a mic o-le el ex ension o he p esen model o o e come a di e ence
in coun y policy.
Keywo ds: So e eign c edi a ings, inancial ma ke de elopmen , panel da a models, S anda d
and Poo ’s, Moody’s, Asia.
JEL Classi ica ion: E44, F3, C23, G15.
APA S yle Ci a ion: Pe aiz, K., Vi gle o á, Z., Khan, M. A., Akba , U., & Popp, J. (2021).
So e eign C edi Ra ings and Asian Financial Ma ke s. E&M Economics and Managemen ,
24(1), 165–181. h ps://doi.o g/10.15240/ ul/001/2021-1-011
In oduc ion
So e eign c edi a ing (SCR) is an impo an
u ensil o judge he c edi wo hiness and
compe i i eness o an economy, which
acili a es he po en ial in es o s o gain
con idence in making in es men decisions
ac oss he globe (Yang e al., 2019). I se es
as a “c edi passpo ” o in es o s o gain use ul
166 2021, XXIV, 1
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in o ma ion abou he inancial ma ke s in e ms
o dependable sha e p ices, im inancial
obs acles along wi h p o oca i e e ec i e
in es men (Mclean e al., 2012; Xu e al.,
2019; Zhao e al., 2020). Highe SCR signals
a ela i ely highe pe o mance o companies/
economies (Cubas-Díaz e al., 2018). The
e icien ma ke hypo hesis holds ha inancial
ma ke s a e sensi i e o new in o ma ion, whe e
a piece o in o ma ion is ansla ed in o secu i y
p ices, depending upon he de elopmen o
such ma ke s. Li e a u e has es ablished ha
SCR announcemen s in luence he p ices
o inancial secu i ies (Klige e al., 2000;
Poon e al., 2008). The e o e, changes in he
SCR encou age bo h, he s ock ma ke , and
he coun y isk – such a change p o ides
bo owe s and lende s wi h an indica ion o
a co po a ion’s isk p o ile, enabling hem o
de e mine he isk p emiums. SCR imp o es
he capabili y o eme ging economies o
cap u e he in e na ional ma ke by a ac ing
o eign in es men s (And i zky e al., 2007;
Bissoondoyal-Bheenick e al., 2015; D o ský
e al., 2019; Ga u o á e al., 2020; Khu sheed
e al., 2018; Kim e al., 2008; Hussain e al.,
2018). Mos o he e e ed s udies examine he
sho - e m e ec s o such announcemen s on
secu i y p ices using e en s udy app oach and
ind ha he inancial ma ke is sensi i e o SCR
announcemen s, whe e in es o s di e en ly
eac o he new in o ma ion, depending upon
he di ec ion (posi i e/nega i e) and magni ude
o change (Böninghausen e al., 2015; B eme
e al., 2002; C eigh on e al., 2007; Hu e al.,
2016; Jo ion & Zhang, 2007; Klima ičiena,
2011; Li e al., 2019; Michaelides e al., 2012;
No den & Webe , 2004; Puk huan hong-Le e
al., 2007; Subaşı, 2008).
Impo an ly, he e en s udy me hodology
p o ides inpu o sho - un in es men
decisions, whe e s a egic in es men
decisions demand a mo e ca e ul analysis
o he implica ion o changes in SCR and
speci ically in Asian ma ke s. Al hough, e en
s udy app oach guides sho - e m in es men
decision, ye , he indings o e en s udy a e
con lic ing (Li e al., 2019). Li e al. (2019) is
an excep ion, which cap u es he sho - and
long- un asymme ic impac o SCR bu his is
also on he Eu opean inancial ma ke using
he nonlinea amewo k (Shin e al., 2014). No
doub ha his is an impo an e o ha ex ends
he li e a u e on he pa adigm o long- un
asymme ic analysis in SCR- inancial ma ke
connec ion, ye his amewo k o e looks some
o he c i ical diagnos ic issues (i.e., c oss-
sec ional dependence, he e oskedas ici y, and
se ial co ela ion) embedded o panel da a
es ima ion.
This pape aims o de e mine he ole o
SCR in he inancial ma ke de elopmen o
Asian economies, which is ound sca ce. The
global inancial c isis sp ead h ough ade
and inancial channels hi he Asian economy
and caused a simul aneous global slowdown.
The huge unce ain y in he u u e o he Asian
economy has led o he eco e y o he inancial
sys em, which has p omo ed his esea ch. We
use D iscoll K aay’s co a iance ma ix (D iscoll
e al., 1998) o in es iga e he impac o SCR
announcemen s on he de elopmen o inancial
ma ke s in 24 Asian economies/ egions om
1990 o 2018.The pape is o ganized as ollows:
he li e a u e e iew b ings a c i ical e iew o
ano he in e na ional esea ch ha ocuses
on he opic o SCR. The ollowing pa deals
wi h he ma e ials and me hods used o ul ill
he aim o he pape . The nex pa ou lines he
empi ical esul s and discussion o he esul s.
The pape is concluded wi h a summa y o he
main esul s and limi a ions o he pape .
1. Theo e icalBackg ound
The h ee main a ing agencies (Moody’s,
S anda d and Poo ’s and Fi ch) p o ide c edi
a ings based on economic, social, and poli ical
ac o s (Chen e al., 2016; Chodnicka-Jawo ska,
2017). Many pieces o esea ch ha e con i med
he impo ance o SCR o he economic
de elopmen o coun ies (e.g. A onso e al.,
2011; Gä ne e al., 2011; Teixei a e al., 2014).
SCR in luences a bo owing cos in in e na ional
ma ke s no only o he so e eign s a e bu
also o he inancial ins i u ion ac i e in ha
s a e (D ago & Gallo, 2017). Chen e al. (2016)
s a e ha SCR has an impac on in es men
decisions and economic g ow h. Adelino and
Fe ei a (2016) show he dependence o he
a ing sco e o banks on he SCR. Banks a e
a ec ed i he SCR is downg aded. Al a illa e
al. (2017) poin ed ou a s ong e ec o SCR on
bank lending and domes ic i m in he case o
banks om he Eu ozone. Acco ding o Gilch is
e al. (2014), i in es o s es ima e he high isk
o he coun y, hey demand highe in e es
a es. Fi ch (2014) poin s he highe impo ance
o SCR du ing he c isis. The e ec o inancial
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c ises on SCR has been analyzed by Ams ad
and Packe (2015).
A coun y’s inancial his o y, liabili ies
and cu en asse s a e used o calcula e
SCR and a e subjec o isk assessmen and
p o ide in es o s wi h a ai assessmen . The
downg ade o so e eign a ings in neighbo ing
coun ies du ing he c ises a ec s s ock ma ke s
(Muha am e al., 2019). Re u ns o coun ies
e ec ed by c isis e ec s due o changes in
he a ing o o he coun ies, sugges ing ha
SCR changes ope a e as a u he a enue o
in e na ional inancial con agion du ing he
Asian inancial c ises is con i med by (Li e al.,
2008). A coun y’s inancial s abili y o he long
un is la gely de e mined by a mix u e o cu en
accoun balances, o eign deb le el, he s abili y
o o eign exchange, cu en accoun balances,
and in e na ional liquidi y (Gospoda chuk &
Suchko a, 2019; Lu e al., 2020). In he long
un, inancial, economic, and poli ical a iables
a ec he s ock ma ke o Tu key (Sa i e al.,
2013). Whe eas only poli ical and inancial isk
a iables a e ha ing an impac in he sho
un. A e he inancial c isis, liquidi y isk was
conside ed in he model o Eu opean banks by
he cha ac e is ics o banks (such as capi al,
size, and business model). Expe imen al esul s
show ha he co e banking business, based
on he ma u i y ans o ma ion p ocess, is he
mos sensi i e o liquidi y isk (Galle a e al.,
2019). Legal ins i u ional en i onmen is closely
connec ed o he banking sys em pe o mances
and hus so e eign c edi s a ings as he esul s
om he s udy Kao e al. (2019) show.
Ano he esea ch in es iga ed he dynamic
ela ionship be ween liquidi y and c edi isk in
he I alian deb ma ke h ough he Eu ozone
c isis and succeeding Eu opean Cen al Bank
in e e ences – indings e eal ha c edi isk
is a majo d i e o ma ke liquidi y (Pelizzon e
al., 2016; Helle & Wa zala, 2019). De Souza
Mu cia e al. (2013) s udied he e ec o SCR
in he lis ed public companies’ s ock p ices in
he B azilian ma ke and e eals ha SCR
decla a ion has in o ma ion con en because i
will a ec s ock e u ns and lead o abno mal
e u ns, especially when hey ca y he bad news
o he ma ke h ough he obse a ion sample o
242 lis ed companies h ough e en esea ch.
This iew is la gely due o he belie ha he
coun y’s a ings do p o ide new in o ma ion o
inancial ma ke s. Bissoondoyal-Bheenick e
al. (2015) wi nesses ha he upg ade o SCR
has signi ican ly a ec ed he s ock ma ke .
Ra ing imp o emen usually occu s du ing he
uni ica ion o inancial ma ke s, while a ing
decline occu s du ing pe iods o a ma ke
down u n.
Speci ically, Huang e al. (2018) examine
how he downg ade o bond a ings ook
in o accoun he p ice o China’s common
s ock and sugges ed ha he a ings gi en
by a ing agencies ha e in o ma ion alue
and ha he ma ke e ec i ely esponded o
such announcemen s. The s eng h-based
Eu ozone mas e sp ead model de e mines he
liquidi y p icing e ec in he sp ead be ween
bonds issued by Ge man ins i u ions and hei
so e eign coun e pa s. The au ho s ound ha
liquidi y e ec s accoun ed o a conside able
sha e o sp ead luc ua ions (Mon o e
al., 2013). Only he Chinese s ock ma ke
is poli ically isk-sensi i e p o ed by wide
esea ch on BRICs coun ies (Hammoudeh
e al., 2013). Asian s ock exchange is closely
connec ed o he U.S. s ock exchange and
o he wo ld inancial ma ke s esul ing in global
spillo e e ec ha impac s coun y’s c edi
a ings (Gulza e al., 2019).
The impac o SCR on co po a e bo owing
goes beyond he so e eign a ing p ocess.
Resea ch on he impac o so e eign caps on
company a ings emains impo an in coun ies
whe e capi al accoun es ic ions s ill exis and
coun ies wi h high poli ical isks (Bo ensz ein
e al., 2013). Ano he esea ch s a ed ha he
join impac o he announcemen o a ing on
pai wise co ela ion is insigni ican (Sensoy e
al., 2016).
In addi ion, he in luence o indi idual a ing
agencies shows ha Moody’s announcemen s
a e mo e in luen ial han o he announcemen s.
Thei indings indica e ha due o changes
in so e eign a ings, shocks wi hin a single
coun y gene ally do no sp ead. In o he wo ds,
he a ea is less a ec ed by sys emic isks.
Acco ding o Ismailescu e al. (2010), by using
a sample o 22 eme ging ma ke s om 2001 o
2009, posi i e a ing announcemen s a e mo e
likely o a ec o he eme ging ma ke s han
nega i e announcemen s. E idence om he
Eu opean deb ma ke wi nessed he signi ican
impac o so e eign a ing news om 1995 o
2010 (A onso e al., 2011).
A ound he Asian inancial c isis, in he
egion on he Asia Paci ic, i was obse ed
ha he esul s o di e en so e eign a ing
168 2021, XXIV, 1
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announcemen s exposed he spillo e
e ec s on he s ock and cu ency ma ke s
(T eepongka una e al., 2012). They ound
ha he cu ency and s ock ma ke s eac ed
signi ican ly di e en ly o a ing announcemen s.
Compa ed o he money ma ke , he s ock
ma ke esponded mo e o a ing news. They
ound clea e idence ha he a ing e en had
a signi ican and asymme ic impac on he
second momen o asse ma ke e u ns unde
no mal ma ke condi ions, while he na ional
ma ke aspec a ec ed he a ing oo p in du ing
he inancial c isis. Bo h posi i e and nega i e
announcemen s o bond and s ock p ices
change on he “ inal” ou e, e en i he changes
a e small (End ess, 2018). Li e al. (2019) is
he excep ion which depa s om he adi ional
e en-s udy app oach in in es iga ing he SCR-
inancial ma ke de elopmen connec ion using
asymme ic modeling (Shin e al., 2014) and
ound he p esence o nonlinea i ies ansla ed
by SCR announcemen (S anda d and Poo ’s,
and Moody’s) o s ock ma ke deploymen in he
Eu opean egion.
D awn on he p emises o con lic ing
li e a u e, sho - e m p emia o e en s udy
app oach, and limi a ions associa ed wi h
econome ic es ima o used in ela ed s udies,
he esea ch ques ion is d awn, wha may be
he impac o so e eign c edi a ings on he
inancial ma ke de elopmen in he Asian
egion? To empi ically answe his ques ion,
his s udy a emp o in es iga e he impac
o SCR announcemen s on Asian inancial
ma ke de elopmen , using obus s anda d
e o clus e ing es ima o s. The choice o Asian
egion is led by 1) he se e al unpleasan
inancial e en s wi hin he egion o ac oss he
globe which subs an ially in ec ed he inancial
ma ke s (Li e al., 2008; Mu cia e al., 2013;
T eepongka una e al., 2012). These e en s
include he global inancial c isis (also called
he sub-p ime mo gage c isis), and he Asian
inancial c isis. The global inancial c isis e e s
o he pe iod o ex eme s ess in global inancial
ma ke s and banking sys ems be ween mid-
2007 and ea ly 2009, du ing which a down u n
in he U.S. housing ma ke was a ca alys o
a inancial c isis ha sp ead om he Uni ed
S a es o he es o he wo ld h ough linkages
in he global inancial sys em, whe e Asian
economies ha e su e ed immensely. While
he Asian inancial c isis was a pe iod o he
inancial c isis ha g ipped much o Eas Asia
and Sou heas Asia beginning in July 1997 and
aised ea s o a wo ldwide economic mel down
Fig. 1: A compa ison o inancial ma ke de elopmen pa e n in Eu ope and Asian
Sou ce: Eu opean Communi ies (2006)
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1, XXIV, 2021
Finance
due o inancial con agion. Ano he eason o
choose he Asian egion is i s inancial ma ke
cad e ha is ela i ely less de eloped compa ed
o he Eu opean egion (Li e al., 2019). The
scena io is illus a ed in Fig. 1, whe e he blue
cu e shows he inancial ma ke de elopmen
sco e o he Eu opean egion, while he o ange
cu e shows he same o he Asian egion
(a e age o 24 economies/ e i o ies included in
es ima ion). The inancial ma ke de elopmen
sco e and his o ical pa e ns in bo h he egion
illus a e ha Asia is low ela i e o coun e pa .
This may be unde pinned by he middle and
low-income cad e o mos o he economies o
he egion as well as low egula ions pe aining
o he inancial ma ke s. The low pe o mance
can also be linked o he global inancial c isis,
in gene al, and he Asian inancial c isis in
pa icula , whe e he inancial sec o su e ed
mos .
On he o he on , he global inancial c isis
had hi Asian economies wi h unexpec ed
speed and o ce (Kea , 2009). The global
inancial c isis led o a synch onized global
slowdown s a ing in he second hal o 2008,
which ansmi ed h ough ade and inancial
channels, pa icula ly in hose Asian economies
wi h s ong links o in e na ional ma ke s (Ruiz-
B unschwig e al., 2011). The impac o he c isis,
howe e , di e ed among economies depending
on he deg ee o dependency o ex e nal
demand and c edi , whe e, he Republic o
Ko ea, Thailand, Malaysia, Philippines, China,
and India as well as many o he Sou heas
Asian economies, expe ienced a ma ked
slowdown in expo demand ha had impo an
spillo e e ec s in o he es o he economy
(Ruiz-B unschwig e al., 2011). The e emains
signi ican unce ain y in he u u e o Asian
economies ha causes he inancial sys em o
eco e slowly ela i e o Eu ope. While c oss-
bo de spillo e s led o he se e e unde p icing
o a ious ypes o asse s in Asia, he pa icula
illus a ion comes om an examina ion o he
inancial ma ke spillo e s om he Wes o Asia
du ing he global inancial c isis (Fila do, 2011).
The abo e desc ip ion mo i a es he p esen
s udy o conside he Asian egion as a sample
o po en ial analysis.
2. Resea chObjec i e,Me hodology,
and Da a
P ecisely, his s udy in es iga es he impac o
SCR announcemen s on he inancial ma ke
de elopmen o 24 Asian economies/ e i o ies
(selec ed subjec o da a a ailabili y) om 1990
o 2018, using D iscoll K aay’s co a iance
ma ix (D iscoll e al., 1998) ha is obus in
clus e ing s anda d e o . The lis o coun ies/
e i o ies included in he analysis is annexed
in Tab. A1.
2.1 Va iablesandDa a
Aligned wi h Li e al. (2019), he s udy u ilizes
inancial ma ke de elopmen index (FD_FM)
– dependen a iable, o which da a ha is
compiled om IMF S a egy, Policy, and Re iew
Depa men . The index comp ises inancial
ma ke s access (FD_FMA), dep h (FD_FMD),
and e iciency (FD_FME). FD_FMA compiles
da a on “pe cen o ma ke capi aliza ion ou side
o op 10 la ges companies and o al numbe
o issue s o deb (domes ic and ex e nal,
non inancial and inancial co po a ions) pe
100,000 adul s”. FD_FMD compiles da a
on “s ock ma ke capi aliza ion o GDP,
in e na ional deb secu i ies o go e nmen o
GDP, and o al deb secu i ies o inancial and
non inancial co po a ion o GDP”. FD_FME
compiles da a on “s ock ma ke u no e a io
(s ocks aded o capi aliza ion)”. The nume ic
alues assigned by he depa men ange
be ween 0–1, 0 shows he leas de eloped
inancial ma ke s and 1 documen ema kable
de elopmen o he sec o . The index is escaled
o 100 o in e p e a ion pu poses.
SCR is independen a iable, which e lec s
he c edi wo hiness o a coun y o epay
i s deb obliga ions as hey come due. The
weigh anges be ween 0–100, he highes
sco e acknowledges he low de aul isk o
a coun y, while he lowes sco e makes i
exposed o de aul isk. SCR g ades a e
ob ained om S anda d and Poo ’s (SCRS)
and Moody’s (SCRM) pe iodical ou looks
and nume ic weigh s a e assigned based on
ading economics benchma k (Tab. A2). The
Fi ch SCR a e no included in he es ima ion,
because hose a e iden ical o ha o S anda d
and Poo ’s nume ic sco es. The desc ip ion
sligh ly di e s, while nume ic sco es a e alike.
Economic g ow h (E.G.) is measu ed as
he na u al loga i hm o pe capi a GDP, T ade
Openness (TRO) is a sum o expo s, and
impo s p opo iona e o GDP, in la ion (INF)
is ep esen ed by a consume p ice index,
banking de elopmen (D.C.) is deno ed by
domes ic c edi o he p i a e sec o as o GDP,
170 2021, XXIV, 1
Finance
and in es men (INV) is p oxied by g oss ixed
capi al o ma ion a io o GDP. The da a o
E.G., TRO, INF, DC, and INV a e also sou ced
om WDI. All he a iables a e ans o med
in o a na u al loga i hm o e icien es ima ion.
The desc ip i e s a is ics o all a iables a e
p o ided in Tab. 1. We excluded some coun ies
due o missing da a (A ghanis an, A menia,
Bangladesh, Bhu an, B unei, Cambodia,
Maldi es, Myanma , Nepal, No h Ko ea,
Pales ine, S i Lanka, Eas Timo , Geo gia, I an,
I aq, Ky gyzs an, Laos, Macao, Sy ia, Taiwan,
Tajikis an, Tu kmenis an, Uzbekis an, Yemen).
2.2 Econome icSpeci ica ion
Following Li e al. (2019) ou baseline panel
ixed e ec model is speci ied in he ollowing
o mula:
yi = xi θ+εi
Va iable Obs Mean S d. de . Min Max
FD_FM 696 3.352 0.921 0 4.503
FD_FMD 696 3.256 1.039 0 4.533
FD_FMA 696 2.88 1.728 −2.632 4.605
FD_FME 696 3.029 1.458 −1.809 4.605
SCRS 696 4.03 0.404 2.303 4.605
SCRM 696 4.025 0.382 2.708 4.605
EG 696 9.599 1.166 6.852 11.749
INV 696 3.191 0.269 2.367 4.055
INF 696 1.161 1.24 −4.092 7.538
TRO 696 4.267 0.663 2.561 6.041
DC 696 4.279 0.701 2.148 5.981
Sou ce: own
Tab. 1: Desc ip i e s a is ics
Va iable LLC le el Rema ks CIPS le el Rema ks
FD_FM −5.44*** Yes −2.73*** Yes
FD_FMD −4.98*** Yes −2.49*** Yes
FD_FMA −5.29*** Yes −2.66*** Yes
FD_FME −4.59*** Yes −2.59*** Yes
SCRS −2.28** Yes −2.16** Yes
SCRM −7.37*** Yes −3.85*** Yes
EG −7.09*** Yes −3.95*** Yes
INV −9.82*** Yes −4.37*** Yes
INF −8.72*** Yes −4.56*** Yes
TRO −9.11*** Yes −4.34*** Yes
DC −7.51*** Yes −4.02*** Yes
Sou ce: own
No e: LLC = Le in-Lin-Chu uni - oo es ; CIPS = Pesa an’s uni - oo es wi h c oss-sec ional independence.
Tab. 2: Fi s and second-gene a ion uni - oo es esul s
171
1, XXIV, 2021
Finance
whe e he dependen a iable yi is FD_FM, xi
is a (K + 1) × 1 ec o o independen a iables
(SCRi , INVi , TROi , EGi , INFi , and DCi ) whose
i s elemen is 1 and θ is (K + 1) × 1 ec o o he
unknown coe icien . i deno es he c oss-sec ional
uni s (“indi iduals”) and deno es ime. All
he ac onyms used in his sec ion a e de ined
in sec ion 2.1. The es ima o used by Li e
al. (2019) is applicable in he case o unique
in eg a ion o de , whe e he unde lying a iables
a e ound ha ing mixed in eg a ion o de (le el,
and i s di e ence), which does no hold in he
p esen case. Tab. 2 inco po a es bo h i s - and
second-gene a ion panel uni - oo es esul s,
which shows ha all he a iables a e s a iona y
a le el. The e o e, con inuing wi h Li e al.
(2019) asymme ic modeling is no sui able.
In addi ion, Li e al. (2019) do no accoun
o common panel da a issues o c oss-
sec ional dependence, he e oskedas ici y,
and se ial co ela ion. The e o e, he scena io
calls o a obus es ima o capable o dealing
wi h s anda d e o clus e ing issues. We i s
es ima e he panel ixed e ec model, and es
i s diagnos ic p ope ies, which e eal ha he
es ima o iola es he s anda d assump ions.
Thus, we op D iscoll K aay’s co a iance
ma ix es ima o (D iscoll e al., 1998), which
o e comes he sho comings a ibu ed o panel
ixed e ec es ima o , pa icula ly, p o ided ha
he esiduals a e independen ly dis ibu ed,
s anda d e o s which a e ob ained by he aid o
his es ima o a e consis en e en i he esiduals
a e he e oscedas ic (Hoechle, 2007). D iscoll
K aay’s ixed-e ec s es ima o is implemen ed
in wo s eps. In he i s s ep all model a iables
zi ∈ {yi , xi } a e wi hin- ans o med as ollows:
z i = zi –zi +zi ,
whe e:
z i = Ti
–1∑Ti = i1 zi andzi = (∑Ti)–1∑i ∑ zi
Recognizing ha he wi hin-es ima o
co esponds o he OLS es ima o o he second
s ep han es ima es he ans o med eg ession
model in he ollowing equa ion by D iscoll
K aay’s s anda d e o .
y i =x΄
i θ+εi
3. Resul s
Fo 24 coun ies/ egions, we pe o m
a eg ession analysis on SCR changes based
on FD_FM and i s ac o s. Reg ession esul s
include c oss-sec ional obse a ions o each
explana o y a iable based on au oco ela ion,
g ouped he e oscedas ici y using a modi ied
Wald es , and adjus ed FD_FM R2 (including
h ee ac o s), shown in Tab. 3. As can be
seen, he adjus ed R2s a e no high, FD_FMA
has a ela i ely lowe adjus ed R2, and he
highes one is o he FD_FMD (i.e., 0.075),
which is signi ican . This demons a es ha he
eg ession a iables do no ha e a ia ions in
he SCR. SCR has a di ec and s ong impac
on he pe o mance o inancial ma ke s excep
o FD_FMA, all o he ac o s a e abo e 50%.
The INV, INF, E.G., and D.C. coe icien s o all
Asian coun ies a e appea ed nega i e excep
o TRO which has be e impac wi h FD_FMD
(i.e., 0.163).
Conside ing he c oss-sec ional dependence,
we can conclude ha he e is sample e idence
ha he sampled Asian coun ies should go
hand in hand wi h he a iables ha p omo e
g ow h. This indica es ha he e a e di e ences
be ween coun ies in he li e a u e. Fo
example, he selec ed Asian coun ies can be
s udied sepa a ely, he eby s imula ing he need
o applying ime-se ies es ima ion. Secondly,
despi e he o ma ion o he Asian g oup o
coun ies, i one economy ollows he sequence
a e ano he , hei in eg a ion may be ha de o
achie e. Tab. 3 shows ha using he baseline
panel ixed e ec model, SCRS posi i ely
explains he FD_FM and i s h ee componen s
(access, dep h, and e iciency). One s anda d
de ia ion posi i e change in SCRS b ings
abou 0.52 s anda d de ia ion imp o emen in
inancial ma ke de elopmen .
In con as , he same change in SCRS
ansla es 0.42, 0.84, 0.76 s anda d de ia ion
imp o emen in inancial ma ke access, dep h,
and e iciency, espec i ely. This implies ha
SCRS helps ci izens o Asian economies
access he inancial se ices o e ed wi hin
each economy, and i also deepens he
inancial se ices and enhances hei e iciency.
Among con ol a iables, TRO appea s o be
a s imula o o inancial ma ke de elopmen
ac oss all models. In con a y, INV, E.G., INF, and
D.C. ha e nega i ely impac ed inancial ma ke
de elopmen , bu coe icien s a e no consis en
ac oss all models. Al hough he indings a e
compa ible wi h he in ui ion, he bo om pa o
Tab. 3 shows diagnos ic s a is ics, which calls
o es ima ing a obus es ima o o co ec /
172 2021, XXIV, 1
Finance
clus e hese issues. In pa icula , Pesa an’s
c oss-sec ional independence es , Woold idge
F- es o au oco ela ion, and Modi ied Wald
es o g oupwise he e oskedas ici y ha e
shown p esence diagnos ic p oblems wi h he
es ima ed ixed-e ec model. Thus, we p oceed
o obus s anda d clus e ing es ima o .
Tab. 4 inco po a es he obus ness esul s
using al e na i e es ima o s such as FGLS
(Beck & Ka z, 1995), Whi e (1980), Roge s
(1993), Fama and MacBe h (1973), and
D iscoll K aay (1998), such es ima o s helped
in co ec ing/clus e ing he s anda d e o
issues which we e diagnosed/ epo ed in
Tab. 3. All hese es ima o s show a signi ican
and posi i e impac o SCRS on FD_FM (being
highes wi h FGLS wi h 0.681, while all o he
also abo e 50%) in he Asian egion. Also, wi h
FGLS, con ol a iable INV appea s posi i e,
and he dependen a iable FD_FM is highe
in esponse o TRO using Roge s’ (i.e., 0.127).
The E.G., INF, and D.C. seem nega i e wi h
all es ima o s wi h di e en magni ude. Thus,
o e all indings a e obus and consis en wi h
Va iables (1) (2) (3) (4)
FD_FM FD_FMA FD_FMD FD_FME
SCRSi
0.519*** 0.422*** 0.844*** 0.757***
(0.115) (0.107) (0.144) (0.191)
INVi
−0.199** −0.041 −0.124 −0.229*
(0.082) (0.076) (0.102) (0.136)
TROi
0.127*** 0.069** 0.163*** 0.148***
(0.034) (0.032) (0.043) (0.057)
EGi
−0.026 −0.017 −0.067** −0.025
(0.022) (0.020) (0.028) (0.037)
INFi
−0.030 −0.011 −0.049** −0.052
(0.019) (0.018) (0.024) (0.032)
DCi
−0.060* −0.085*** −0.074* −0.033
(0.034) (0.031) (0.042) (0.056)
Cons an 1.890*** 1.556*** 0.569 0.529
(0.565) (0.522) (0.706) (0.938)
Obs. 696 696 696 696
C oss-sec ions 24 24 24 24
Adj. R-squa ed 0.061 0.040 0.075 0.041
Fixed e ec Yes Yes Yes Yes
Pos es ima ions
Pesa an’s es o
c oss-sec ional independence 34.122*** 19.535*** 42.65*** 15.72***
Woold idge F (au oco ela ion) 243.61*** 49.42*** 173.29*** 59.319***
Modi ied Wald es
(g oupwise he e oskedas ici y) 5,007.04*** 10,957.72*** 9,830.23*** 120,000***
Sou ce: own
No e: S anda d e o s a e in pa en hesis; *** p < 0.01, ** p < 0.05, * p < 0.1.
Tab. 3: Fixed e ec eg ession esul s
173
1, XXIV, 2021
Finance
he main esul s, which makes ou esul s
epo ed in Tab. 3 alid. Hence, SCRS helps
Asian economies ob ain inancial se ices
p o ided by each economy, he eby imp o ing
e iciency and deepening inancial se ices.
The s udy pe o ms second obus ness
using al e na i e measu e SCRM. Tab. 5 shows
he esul s o D iscoll K aay’s obus es ima o ,
which p oduces consis en esul s o SCRS,
excep o a sligh a ia ion in he explana ion’s
magni ude. Unde his speci ica ion, he SCRM
explains FD_FM by 0.603, comp ised o he
FD_FMA wi h 0.43, FD_FMD by 0.57, and
FD_FME by 0. 51. TRO is posi i ely d i ing he
FD_FM, which needs o be imp o ed u he o
a ac o eign capi al lows o he Asian egion.
This obus ness also shows E.G., INF, and
D.C. nega i e. The explana ion is subs an ial o
coun as aluable inpu o policy implica ions
o Asian equi y ma ke s. These exci ing indings
p o ide use ul insigh s in o in es men and
economic g ow h egula ions. Besides, hese
esul s con i m he impo ance o conside ing
necessa y con ols when s udying o he ac o s.
To be consis en , he s udy checks hi d
obus ness using an al e na i e es ima o
(FGLS, and D iscoll K aay’s) wi h sub-
dimensions o FD_FM, whe e SCRS is aken
as an explana o y a iable. In e es ingly, he
indings a e consis en wi h he main model.
Unde FGLS, one s anda d de ia ion upwa d
mo emen in SCRS explains FD_FMA wi h
0.13, FD_FMD wi h 1.05, FD_FDE wi h 0.75
espec i ely in model 1–3. Simila ly, unde
D iscoll-K aay es ima o , he upwa d mo emen
in SCRS boos s FD_FMA wi h 0.42, FD_FMD
wi h 0.84, and FD_FDE wi h a 0.76 s anda d
de ia ion espec i ely in model 4–5. This
Va iable
(1) (2) (3) (4) (5)
FD_FM FD_FM FD_FM FD_FM FD_FM
FGLS Whi e Roge s Fama-MacBe h D iscoll K aay
SCRSi
0.681*** 0.519*** 0.519*** 1.146*** 0.519***
(0.037) (0.214) (0.115) (0.093) (0.097)
INVi
0.028 −0.199* −0.199** −0.388*** −0.199*
(0.051) (0.108) (0.082) (0.132) (0.115)
TROi
0.120*** 0.127* 0.127*** 0.093** 0.127***
(0.020) (0.073) (0.034) (0.040) (0.029)
EGi
−0.033*** −0.026 −0.026 −0.053 −0.026*
(0.012) (0.034) (0.022) (0.040) (0.014)
INFi
−0.037*** −0.030 −0.030 −0.041 −0.030*
(0.013) (0.021) (0.019) (0.035) (0.017)
DCi
−0.123*** −0.060 −0.060* −0.034 −0.060**
(0.021) (0.083) (0.034) (0.038) (0.026)
Cons an 1.285*** 1.890 1.890*** 0.247 1.890***
(0.245) (1.276) (0.565) (0.767) (0.420)
Obs. 696 696 696 696 696
C oss-sec ions 24 24 24 24 24
R-squa ed 0.061 0.061 0.430
Sou ce: own
No e: S anda d e o s a e in pa en hesis; *** p < 0.01, ** p < 0.05, * p < 0.1.
Tab. 4: Robus ness: al e na i e es ima o s
180 2021, XXIV, 1
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No e: Coun ies/ e i o ies no included in es ima ion a e d opped due o da a una ailabili y/limi ed obse a ions wi h
espec o so e eign c edi a ing announcemen s.
Appendix
S. No. Coun y/ e i o y S. No. Coun y/ e i o y
1 Aze baijan 13 Lebanon
2 Bah ain 14 Malaysia
3China 15 Mongolia
4 Hong Kong SAR, China 16 Oman
5 India 17 Pakis an
6 Indonesia 18 Philippines
7 Is ael 19 Qa a
8 Japan 20 Saudi A abia
9 Jo dan 21 Singapo e
10 Kazakhs an 22 Thailand
11 Sou h Ko ea 23 Uni ed A ab Emi a es
12 Kuwai 24 Vie nam
Sou ce: h ps:// adingeconomics.com/
Tab. A1: Lis o Asian coun ies/ e i o ies
S anda d and Poo ’s Moody’s Desc ip ion T ading economics
sco e
AAA Aaa P ime 100
AA+
AA
AA−
Aa1
Aa2
Aa3 High g ade 95
90
85
A+
A
A−
A1
A2
A3 Uppe medium g ade 80
75
70
BBB+
BBB
BBB−
Baa1
Baa2
Baa3
Lowe medium g ade 65
60
55
BB+ Ba1 Non-in es men g ade 50
BB
BB−
Ba2
Ba3 Specula i e 45
40
B+
B
B−
B1
B2
B3
Highly specula i e 35
30
25
CCC+ Caa1 Subs an ial isks 20
CCC Caa2 Ex emely specula i e 15
CCC−
CC
C
Caa3
Ca
CIn de aul wi h li le p ospec o eco e y 10
5
D/ In de aul 0
Sou ce: h ps:// adingeconomics.com/coun y-lis / a ing
Tab. A2: C edi a ings ou look and sco e