Stock Market Liberalization in Middle East and North Africa Countries - Research Proposal Example

Stock Market Liberalization in MENA Countries Institution: Name: Date: Abstract This paper will discuss the stock market libеrаlizаtiоn in Middle Еаst and North Аfriса Countries. The paper will also analyze the effectiveness of various researches undertaken in the process of attaining stock market liberalization in Middle East and North African countries. Emphasize laid on the contribution by other researchers concerning the effects of stock market liberalization on the citizens saving and investment in Middle East and North African countries. This article will also focus on how allowing foreign direct trade (FDI) in emerging stock market will affect the share price in the short term and furthermore on how foreigner traders help the efficiency and growth of emerging stock market (Bekaert, Geert, et al, 2007, Pg 1784). Understanding of stock market liberalization in the financial field of emerging markets is of significance for the financial welfare as it instills commitment among the citizens and safe practices; hence, reducing error rates. Different authors in their articles have been of help in the field. Methods used to collect data, research design, dependent and independent variables, measurements methods and conclusion of the results will be dealt with in the paper. Citizens in Middle East and North African countries have suffered in the hands of financial advisors who fail to attend to their needs appropriately; this is due to lack of appropriate financial skills and qualification to handle risk situations in a professional way. A number of citizens have encountered financial losses in the hands of these advisors, the introduction of Stock Market libеrаlizаtiоn in Middle Еаst, and North Аfriса Countries have been a substantial improvement in the economic field (Billmeier et al, 2008, pg 947). Table of Contents Stock Market Liberalization in MENA Countries 1 Institution: 1 Name: 1 Date: 1 Abstract 2 Table of Contents 3 Stосk Market Libеrаlizаtiоn in Middle Еаst and North Аfriса Countries 4 Introduction 4 Research background and rationale 5 Research questions and objectives 5 Preliminary literature review 5 Proposed Design and Methodology 8 Conclusion 10 Stосk Market Libеrаlizаtiоn in Middle Еаst and North Аfriса Countries Introduction In the stock Market shares are traded and issued through exchanges market or over the counter markets. Stock markets are also know as equity market which forms the most critical part of market economy since it provides firms access to investors and capital with a piece of ownership in the firm and prospective of gains based on the firms future performance (Henry, P., 2000, pg 529). According to Peter Blair Henry (2000), stock liberalization is a State government decision to allow international investors to buy shares in the domestic stock market. On average, national’s aggregate equity price index experiences abnormal revenue of 3.3% every month (in terms of real dollars) during an 8 month window resulting to implementation of its first stock market liberalization. This outcome is consistent with the prediction of standard international asset pricing models that stock market liberalization may decrease the liberalizing State's cost of equity capital by allowing for risk sharing between foreign and domestic agents (Henry, p. 2000, pg 532). Financial liberalization of equity markets over the past three decades led to a large and growing body of literature on the impact of these reforms on both financial markets and the rest of the economy. Academic interest in these markets is mainly due to the fact that the equity market liberalization allowed, for the first time, foreign investors to invest in domestic equity markets and domestic investors to invest in foreign security markets directly. These reforms also created an opportunity for investors to reduce the risk of their portfolio by diversifying investments in developing stock markets (Smimou & Karabegovic, 2010, page 130). Research background and rationale This study will investigate the work of other researchers regarding the problem to be studied as the challenges resulting from the problem. Work cited from past researchers indicates that MENA citizens’ economic challenges will only be solved when financial stakeholders identifies stock market challenges earlier. Stосk market libеrаlizаtiоn skills obtained by training a sample a number of financial experts and financial controllers from each department will be an effective way in solving the problem (Hagelin et al, 2004, pg 210). Research questions and objectives This research study focuses on the following research questions and objectives: How stoke market liberalization affect the citizens saving and investment in MENA countries? How allowing foreign direct trade (FDI) in emerging stock market will affect share price in the short term? How foreigner traders help the efficiency and growth of emerging stock market? Preliminary literature review Equity market liberalization ultimately means, “Allowing inward and outward foreign equity investment” without restrictions (Smimou & Karabegovic, 2010, page 121). At this point, many nations are somewhere in between being completely segregated to being completely integrated. This is mainly due to restriction on foreign investors, such as limits on foreign equity ownership. Initially, many nations relied on country funds and American Depositary Receipts (ADR) to attract foreign equity investment before they allowed direct foreign ownership investment (Smimou & Karabegovic, 2010, page 129). In this study, we explore the financial nature of the MENA markets, and some specific circumstances arising in these markets. We also consider a host of other issues, such as impact of economic freedom (EF) and the extent to which economic freedom could explain the behavior of equity market returns in some influential MENA markets (Smimou & Karabegovic, 2010). Thus, this paper contributes to the literature on emerging markets by investigating some of the features of the MENA equity markets, which were initially observed in the developed markets. The main focus of this study is investigation of the impact of institutions on equity market returns in the MENA region. This paper is part of the new flows of studies on stock markets in emerging economies (Smimou & Karabegovic, 2010, page 133). Evaluating the performance of stock markets in Middle East and North African countries and the drivers behind MENAs market returns posters a number of challenges for researchers majorly as a result of inadequate and reliable data. Additionally, these markets are in a process of evolution and therefore not stable, yet they provide an opportunity for investors looking at reducing risks in their portfolios (Smimou & Karabegovic, 2010). A number of models known in finance literature might not be enough to capture the actual nature of these markets. Common models for segmented and integrated markets do not capture the changes of a state moving from one nation to another. Nevertheless, the recent tough interest in emerging markets in frontier and general markets specifically pre-emerging equity markets have provided a momentum for future evaluation in that direction and calls for advance research study of current models to accommodate new conditions in MENA markets (Reilly et al, 2005, pg. 145). Amazingly, the growing research body on financial markets and economic freedom largely focuses on the stable and developed markets, possibly the most global established and organized markets. On the other hand, our research focus on markets with weak economic freedom, namely the Middle East and North Africa (MENA) markets (lagoarde-Segot & Lucey, 2009, pg 1481). In fact, national specific risks and different barriers to global investment is as a result of inadequate information, lack of rule of law, discriminatory taxes and funds flow restrictions preventing foreign institutional investors from making investments in Middle East and North African markets(Smimou & Karabegovic, 2010). This resulted to noted bias of investors on local stock in the developed nations. Nonetheless, we believe that the risk premiums are the major features of these emerging markets; therefore, the focus on Middle East and North African markets must help and produce powerful tests and helpful autonomous evidence (Stocker & Marshall, 2005, pg 590). Investment barriers reduction may result to increase in domestic equity price. Thus, equity market liberalization enables international investors to buy domestic equity; this new demand shoots up the prices of domestic equity. Domowitz et al (1997, pg 1062), analyzed the effect of market segmentation as a result of foreign equity ownership restrictions on stock prices in Mexico between 1990 and 1993. Domowitz et al (1997, pg 1062),found out that these restrictions resulted to market segmentation due to significantly high stock prices of restricted shares in domestic stock markets. As noted from the research trend of the emerging market, it is evident that the role of market returns and equity market development by financial institutions has not yet been fully explored (Smimou & Karabegovic, 2010). Therefore, as a result of notable economical influence of the stock market and in answering the belief that equity market shows what is expected to occur in the economy, it is worthwhile to see how financial institutions impact economic growth at the beginning (Romagnoli et al, 2009, pg 79). Proposed Design and Methodology The study design is appropriate as the subject matter of the study will be used with the aim of finding the possible solution to the problem of the study. The researchers will conduct a survey; the study population will be 54 stock market teams from Middle East and North African stock markets. The core function of conducting research using this population will be to determine and examine the form of stock market liberalization techniques employed by head stock markets in evaluating the effects of stock market liberalization on the citizens’ savings and investment in Middle East and North African countries. Each team consists of four stock market officers, one of them being the head stock market. The researchers through the survey study will be able to identify the social significance and benefits of the problem of study to citizens and the possible efforts to be utilized in reducing the effects of stock market liberalization on the citizens’ savings and investment in Middle East and North African countries. Long lasting solutions to the problem will be established from the study information acquired from reviewing results of past researchers that helped a lot in bringing up the possible solutions Promoting the need of stock market liberalization in the Middle East and North African environment among the leaders is the best solution towards the realization of reduction in the number of these effects. Effective communication among the stock market managers concerning the liberalization effects and team’s commitment in the process of executing their duties will be found to be a better solution towards the realization of how allowing foreign direct trade (FDI) in emerging stock market will affect share price in the short term. This leads to early solution to the problem rather than waiting until it has worsened in order to report, stock market managers are thus encouraged to maintain a health communication with other manager in different departments The introduction of the proposed study will achieve its role of guiding its readers on the rationale of the study. The author will introduced the proposed study by highlighting the problems facing citizens in relation to their understanding of liberalized stock market, actions taken by stock market managers in case of realization of any error in the process of administering their services and possible solutions to be taken. The rationale for this study will be justified; when the reader will have in mind the expectation of the market (Bekaert et al, 2003, pg 45). The article described in depth stock market liberalization problems affecting emerging markets and their citizens and possible measures to be taken to curb the problem. The validity of this study will be established as a way of solving the problem in question. The proposed study will put across participants of the study; participants will be 54 stock market teams from Middle East and North African stock markets. The observation time for this study will be six months to ensure that the participants adapt to their new ways of carrying out their activities, examining the change of behavior when reporting stock market reports in time which is meant to evaluate the significance of liberalization. Data collection methods will be described in the article survey to be used as a method of data collection. Survey papers to be filled by each participant will be issued (Sobel & Russell, 2008, pg 121). Observation as a method of data collection will be used, change of behavior in how managers carry out their activities will be monitored for six months to see how there is a change in behavior. The study will clearly describe the independent and dependent variables exposed to different conditions. Possible effects to the participants will be monitored by ensuring that the participants abide by the liberalization values as they deal with their markets, as failure to do so might lead to termination from the job. Stock market managers will be offered an opportunity to learn from errors and look for possible ways to prevent the occurrence of such errors in the future. The study will account for experimental errors by combining high priority of safety and safe economic environment, which ensured that the participants remain psychologically stable throughout the study, thus minimization of possible errors. Reduction of possible confusion within the study will be solved by encouraging readers to stay in line with the stock market values and other managerial problems experienced, this will ensure that there is clarity of issues (Bekaert, Geert, et al, 2007, pg 1823). Conclusion The experimental results will be expected to be in line with the conclusion from other authors and other researchers; thus, the experiment will be appropriate based on the data findings. The results will offer ways of solving problems relating to stock market liberalization in Middle East and North Africa thus minimizing future occurrence of the associated challenges. The writer of the article will gather the information from different authors concerning the same topic of study; this is meant to assist him/her in the experimental research. Consistency of the findings with other research studies will be of significance in comparing the results of various researchers who have conducted similar research topic (Soofi &Abdol, 2008, pg 23). The results of the study will be linked to the introduction of the study solution found to the problems of stock market errors; stock market managers will report the matter as soon as it occurred to guarantee the safety of the citizen's savings and investments. The study fails to carry out research on the behavior of stock market managers in the process of executing their services. Managers may alter their behavior during the time of study, and behave differently when dealing with citizens. The experiment, however, fail to discuss this limitation of using this method to solve effects of stock market liberalization on Middle East and North African countries’ problems (Bekaert, Geert, et al, 2007,pg 1800). The study will attain its objective by addressing the socially significance of the results. The results will be of significance to the financial health and safety emerging market citizens. Stock market stakeholders will work as per the stock market liberalization set requirements thus solutions to the problem the stock market managers will behave in socially and financially accepted way. The author of the article also will relate the study results to the need for stock market liberalization training for stock market stakeholders for the safety of the citizens thus benefit to the community (Bekaert et al, 2003, pg 55). References: Bekaert, Geert, Harvey, & Campbell R., 2003, “Emerging markets finance,” Journal of Empirical Finance 10, 3–55. Bekaert, Geert, Harvey, Campbell R., Lundblad, & Chris, 2007, “Liquidity and expected returns: lessons from emerging markets,” Review of Financial Studies 20 (6), 1783–1831. Billmeier, Andreas, Massa, & Isabella, 2008, “Go long or short in pyramids? News from the Egyptian stock market,” International Review of Financial Analysis 17 (5), 949–970. Domowitz, Ian, Glen, Jack, Madhavan, & Ananth, 1997, “Market segmentation and stock prices: evidence from an emerging market,” The Journal of Finance LII 3, 1059–1085. Hagelin, Niclas, Pramborg, & Bengt, 2004, “Dynamic investment strategies with and without emerging equity markets,” Emerging Markets Review 5 (2), 193–215. Kortas, Mohamed, L'Her, Jean-Francois, Roberge, & Mathieu, 2005, “Country selection of emerging equity markets: Benefits from country attribute diversification,” Emerging Markets Review 6 (1), 1–19. Lagoarde-Segot, Thomas, Lucey, & Brian M., 2007, “International portfolio diversification: is there a role for the Middle East and North Africa?” Journal of Multinational Financial Management 17 (5), 401–416. Lagoarde-Segot, T., & Lucey, M., 2009, “Shift-contagion vulnerability in the MENA stock markets,” The World of Economy 32 (10), 1478–1497. Henry, P,2000, Stock Market Liberalization, Economic Reform, and Emerging Market Equity Prices. The Journal of Finance, American Finance Association, Volume 55, 2 (04) Pages: 529-564 Reilly, Frank K., Wright, David J., Johnson, Robert R., 2005, “An analysis of the interest rate sensitivity of common stocks, paper presented at Financial management association European meeting,” June 6, Siena, Italy. Romagnoli, Alessandro, Mengoni, Luisa, 2009, “The challenge of economic integration in the MENA region: from GAFTA and EU-MFTA to small scale Arab Unions,” Economic Change and Restructuring 42, 69–83. Smimou, K. & Karabegovic, A.,2010, On the relationship between economic freedom and equity returns in the emerging markets: Evidence from the Middle East and North Africa (MENA) stock markets, Emerging Markets Review 11 (2010) 119–151 Sobel, S.Russell, 2008, Economic Freedom, Entrepreneurship, and Economic Growth at the Sub national Level. Economic Freedom of North America: 2008 Annual Report,” The Fraser Institute, Vancouver. Soofi, Abdol S., 2008, “Global financial integration and the MENA countries: evidence from equity and money markets,” Review of Middle East Economics and Finance 4 (2) Article 4. Stocker, L., Marshall, 2005, “Equity returns and economic freedom,” Cato Journal 25 (3), 583 594. Read More