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\def\makelabel##1{\upshape ##1}}% } {\end{list}\end{raggedright}} \newenvironment{specHead}[2]% {\vspace{20pt}\hrule\vspace{10pt}% \phantomsection\label{#1}\markright{#2}% \pdfbookmark[2]{#2}{#1}% \hspace{-0.75in}{\bfseries\fontsize{16pt}{18pt}\selectfont#2}% }{} \def\TheFullDate{2013-01-15 (revised: 15 January 2013)} \def\TheID{\makeatother } \def\TheDate{2013-01-15} \title{The Effects of Financial Liberalization on Stock Market Cycles: Structural Time Series Models} \author{}\makeatletter \makeatletter \newcommand*{\cleartoleftpage}{% \clearpage \if@twoside \ifodd\c@page \hbox{}\newpage \if@twocolumn \hbox{}\newpage \fi \fi \fi } \makeatother \makeatletter \thispagestyle{empty} \markright{\@title}\markboth{\@title}{\@author} \renewcommand\small{\@setfontsize\small{9pt}{11pt}\abovedisplayskip 8.5\p@ plus3\p@ minus4\p@ \belowdisplayskip \abovedisplayskip \abovedisplayshortskip \z@ plus2\p@ \belowdisplayshortskip 4\p@ plus2\p@ minus2\p@ \def\@listi{\leftmargin\leftmargini \topsep 2\p@ plus1\p@ minus1\p@ \parsep 2\p@ plus\p@ minus\p@ \itemsep 1pt} } \makeatother \fvset{frame=single,numberblanklines=false,xleftmargin=5mm,xrightmargin=5mm} \fancyhf{} \setlength{\headheight}{14pt} \fancyhead[LE]{\bfseries\leftmark} \fancyhead[RO]{\bfseries\rightmark} \fancyfoot[RO]{} \fancyfoot[CO]{\thepage} \fancyfoot[LO]{\TheID} \fancyfoot[LE]{} \fancyfoot[CE]{\thepage} \fancyfoot[RE]{\TheID} \hypersetup{citebordercolor=0.75 0.75 0.75,linkbordercolor=0.75 0.75 0.75,urlbordercolor=0.75 0.75 0.75,bookmarksnumbered=true} \fancypagestyle{plain}{\fancyhead{}\renewcommand{\headrulewidth}{0pt}} \date{} \usepackage{authblk} \providecommand{\keywords}[1] { \footnotesize \textbf{\textit{Index terms---}} #1 } \usepackage{graphicx,xcolor} \definecolor{GJBlue}{HTML}{273B81} \definecolor{GJLightBlue}{HTML}{0A9DD9} \definecolor{GJMediumGrey}{HTML}{6D6E70} \definecolor{GJLightGrey}{HTML}{929497} \renewenvironment{abstract}{% \setlength{\parindent}{0pt}\raggedright \textcolor{GJMediumGrey}{\rule{\textwidth}{2pt}} \vskip16pt \textcolor{GJBlue}{\large\bfseries\abstractname\space} }{% \vskip8pt \textcolor{GJMediumGrey}{\rule{\textwidth}{2pt}} \vskip16pt } \usepackage[absolute,overlay]{textpos} \makeatother \usepackage{lineno} \linenumbers \begin{document} \author[1]{Afef Trabelsi Mnif} \affil[1]{ Research unit of economics and development (URED), High School of Commerce in SFAX Tunisia} \renewcommand\Authands{ and } \date{\small \em Received: 6 December 2012 Accepted: 1 January 2013 Published: 15 January 2013} \maketitle \begin{abstract} We compare the behaviour of stock market cycles during repression, in the aftermath of financial liberalization, and in the short and long run following liberalization. We investigate the characteristics of stock market cycles in a group of Latin American (Argentina, Brazil and Chile) and Asian countries (Philippines, Korea, Taiwan and Thailand) during 1975â??"2005. This paper aims to apply the methodology of univariate structural unobserved components time series models. Our results indicate that liberalization triggers more volatile stock market in the short run. Still, liberalization seems to generate more stable financial markets in the long run. Stock market cycles of Asian countries continue to be very high in the post-reform period, mostly because of the influence of the Asian crisis. However, after financial liberalization, Latin American stock market leads to more stable stock market cycles. \end{abstract} \keywords{business cycle, emerging stock market, financial liberalization, structural unobserved components.} \begin{textblock*}{18cm}(1cm,1cm) % {block width} (coords) \textcolor{GJBlue}{\LARGE Global Journals \LaTeX\ JournalKaleidoscope\texttrademark} \end{textblock*} \begin{textblock*}{18cm}(1.4cm,1.5cm) % {block width} (coords) \textcolor{GJBlue}{\footnotesize \\ Artificial Intelligence formulated this projection for compatibility purposes from the original article published at Global Journals. However, this technology is currently in beta. \emph{Therefore, kindly ignore odd layouts, missed formulae, text, tables, or figures.}} \end{textblock*} \let\tabcellsep& \section[{Introduction}]{Introduction}\par uring the late 1980s and early 1990s several Latin America and Asian economies went through a number of economic reforms and financial liberalization. However, these processes have been tempered by financial crisis.\par The crisis illustrates possible risks of financial liberalization.\par There are two contrasting views of financial liberalization. In one view, financial liberalization strengthensfinancial development and contributes to higher long-run growth. In another view, liberalization inducesexcessive risk-taking, increases macroeconomic volatility and leads to more frequent crisis.\par The effect of financial liberalization on growth and its impact on financial fragility and the propensity to crisis have been largely studied in separate strands of the empirical literature. The financial crisis literature tests whether financial liberalization increases the risk of financial crisis. {\ref Kaminsky and Reinhart (1998)}, Detragiache and Demirguc-Kunt (1998), {\ref Rodrik (1998} {\ref Rodrik ( , 2000))}, {\ref Soros (2002)}, {\ref Stiglitz (2002)} and {\ref Glick and Hutchinson (2001)} find that the propensity to crises increases in the aftermath of financial liberalization.\par In contrast, the literature on liberalization claimed that financial liberalization helps to improve the functioning of financial systems and allowing crosscountry risk diversification. For example, Obstfeld (1998), {\ref Stulz (1999)} and {\ref Mishkin (2003)} claim that financial liberalization promotes transparency and accountability, reducing adverse selection and moral hazard while in financial markets.\par The empirical research, so far, has not helped to resolve the conflicting views. In fact, the various lines of empirical research focus either on the short-run or the long-run effects of liberalization, without studying the possible time-varying effects of financial liberalization.\par Studies analyzing the behaviour of stock prices have been undertaken in the recent years. It was confirmed in the study that owing to liberalization the stock markets tend to become more stable. Examples of analyses of emerging market cycles are {\ref Bekaert and Harvey(1997)}, De Santis and Imrohoroglu (1997), \hyperref[b10]{Huang and Yang (1999)}, \hyperref[b16]{Kim and Singal (2000)}, \hyperref[b0]{Aggarwal and al. (1999)}, {\ref Kaminsky and Schmuckler (2003)} and . Financial liberalization cause financial extremes in the short-run and also brings a change in the institutional set up of which will have a supporting and better functioning of financial markets.\par In this paper we focus on analyzing whether the dynamic behaviour of stock market cycles has changed significantly over the period 1975-2005 for seven emerging countries. The choices of countries and period make the analysis especially relevant. Our sample period corresponds to years of profound development of both the financial and the productive sides in these emerging countries, but also to the years of the major financial crises.\par The emerging stock markets analyzed in this paper represent a highly diverse sample. During the period under consideration they had different regulations regarding international capital mobility, different domestic supervisory systems and different exchange rate regimes. Moreover, all of them, with the exception of Chile, faced serious crises during the last few years. This diverse data set, then, allows us to investigate the behavior of business cycle market under different institutional settings and under different external environments. We are particularly interested in addressing the following questions:\par Has stock market cycles characteristics been different across these countries? Has it changed through time?\par The structure of the paper is as follows. In section 2 we present briefly reviews some of the previous contributions on the relationship between financial liberalization and behaviour of stock market. In Section 3 we present he data and the methodology used to identify the characteristic of stock markets cycles. In Section 4, we present univariate unobserved components structural time series models.\par In section 5, we provide a discussion of the results in the context of our analysis. Finally, in section 6 we offer some concluding remarks. \section[{II.}]{II.} \section[{Literature Review}]{Literature Review}\par During the last decades, many emerging countries have liberalized their financial systems. This financial liberalization has been linked to lending booms and crisis. However, markets may become informationally more efficient, behaviour of stock market reacts fully and more quickly to relevant information; also, increased volumes of speculative capital may induce excess volatility. After liberalization, the gradual development and diversification of the markets could lead to lower volatility and to a lower sensitivity to new information.\par We briefly review this literature below to show the effects of financial liberalization on stock market cycles.\par Studies analyzing the behaviour of stock prices over financial cycles have been are mixed. {\ref Bekaert and Harvey (1997)} generally find that volatility decreases after liberalization. De Santis and Imrohoroglu (1997) also find evidence that volatility decreased after liberalization in a subset of countries, such as Argentina. However, Huang and Yang (1999), using the dates of financial liberalization from De Santis and Imrohoroglu (1997), show that the unconditional volatility of the stock markets in three of the countries analyzed (South Korea, Mexico and Turkey) increased after liberalization, whereas it decreased in another four countries (Argentina, Chile, Malaysia and the Philippines). \hyperref[b0]{Aggarwal et al. (1999)} find that most events around the time period when shifts in volatility occur are local but that liberalization processes seem not to have induced the changes in variance. Also, they find both increases and decreases in volatility depending on the country and on the sequence of events. \hyperref[b4]{Bekaert and al. (2006)}, find that volatility of stock market cycles seems to decrease after liberalization. Time varying patterns of financial cycles before and after financial liberalization was examined by {\ref Kaminsky and Schumkler (2001}\hyperref[b13]{, 2002}\hyperref[b14]{, 2003)} in 28 countries using non parametric methodology (turning point detection). The results indicate that more liberalization cause financial extremes in the short-run and also brings a change in the institutional set up of which will have a supporting and better functioning of financial markets. In a study done by , the stock price behaviour in six emerging economies is analyzed. The results they find that volatility after financial liberalization has increased in Asian countries but not in Latin American countries. \section[{III.}]{III.} \section[{Description of Data and Methodologies}]{Description of Data and Methodologies}\par In this paper we analyze stock market cycles in a group of Latin American (Argentina, Brazil and Chile) and Asian countries (Philippines, Korea, Taiwan and Thailand). We investigate the characteristics of stock market cycles during 1975-2005. We make a distinction between the pre and post-financial reform periods, and we concentrate on the following characteristics of stock market cycles: Duration, amplitude and volatility. The data are taken from the S\&P /IFCG1 (S\&P/IFC monthly Global Index) (Standad and Poor / Global International Finance Corporation), which gives monthly series from 1975 to 2005.\par In order to carry out our estimations, we used the application STAMP 7.0 (Structural Time Series Analyser, Modeller and Predictor, 2006) that has been designed especially to deal with unobserved components models (Koopman, Harvey, Doornik and Shephard, 2000).\par The post financial reform is devised on two periods: short effect and long effect of financial liberalization.\par Short run effect: include the four years after the date of liberalization.\par Long run effect: include the fifth year after the date of liberalization.\par The year thereafter, conditional on the deregulation is not being reserved.\par The dates of liberalization (table1) are find by G. L. \hyperref[b15]{Kaminsky and S. Schmukler (2003)}2. Most of studies focuson the elimination of controls on just one particular financial sector, be it the capital account, the domestic financial sector and the stock market. Kaminsky and Schmukler find a chronology deals with the regulations in three sectors. \par Where yt is the logarithm of a series. Tt, Ct and ?t are respectively the trend, cyclical and irregular components.\par The model can include several cyclical components associated to different frequencies. \section[{Stochastic trends}]{Stochastic trends}\par The trend is a local linear one for which both the level and the slope are random walks specified as follows:\par and ?t are orthogonal white noises with variances and respectively. The noise allows the level of the trend to fluctuate while ?t tilts the slope.\par In the general case, it is clear that the trend defined by the equations is an ARIMA (0, 2, 1). But particular cases are interesting: -In the extreme case wheres = 0 the trend is simply a deterministic one.\par -If only = 0, the slope is constant in time and the trend becomes a random walk with drift.\par -If only =0, Slowly Moving Smooth Trend, the trend is still integrated of order two as in the general case but without white noise affecting its level. \section[{Stochastic cycles}]{Stochastic cycles}\par In recursive form the cycle component can be expressed as:\par Ct* is a technical variable needed to write the cycle in recursive form.\par The disturbances ?t and ?t* are two orthogonal white noises with identical variance ??2. The damping factor of the cycle is given by ?, (0