Current Issue

Capital Markets Review Vol. 29, No. 1, pp. 1-16 (2021)

Interaction Impact of Monetary Policy and Inflation on Corporate Debt in Developing Nations

Bolaji Tunde Matemilola1 & Mohamed Azali1
1School of Business and Economics, Universiti Putra Malaysia, Malaysia

Abstract: Research Question: Several firms in developing countries are increasing debt capital to take advantage of debt interest tax-shield but they are also exposed to bankruptcy, especially during this recent coronavirus pandemic period. Motivation: After 60 years of scholarly research, the determination of firms’ capital structure is still a puzzle and is unending. Modigliani and Miller (1963) theory incorporates taxes and it allows for usage of 100 percent debt capital because of absence of bankruptcy costs; but Myers (1984) theory argues for the existence of an optimal capital structure that maximize firms’ value. This study provides empirical validation to the effectiveness of monetary policy to lower corporate debt in the firms’ capital structure. Idea: The article examines the moderating role of monetary policy on the relationship between corporate debt ratios and inflation rate in developing countries, and the moderating role of monetary policy on the relationship between corporate debt ratios and interest rate. Data: Monetary policy rate data are obtained from the official website of each country and from the Economics Trading Websites. Other macroeconomic data are obtained from the World Bank Databases. Institutional quality data are obtained from World Governance Indicators. The firm-level data are obtained from the Datastream databases. We use a total of 3,827 listed firms covering 2007 to 2015 periods. Method/Tools: The study applies the two-step system generalized method of moments which mitigate endogeneity problem. Findings: The findings reveal that monetary policy weakens the positive effect of inflation rate on corporate debt ratios. Conversely, monetary policy strengthens the negative effect of interest rates on corporate debt ratios. These findings suggest that that monetary policy appears effective to lower corporate debt ratios. Moreover, firms should take monetary policy signals into consideration when formulating capital structure decisions. Contributions: First, the article extends earlier studies by introducing new variable – the money market rate as a proxy for monetary policy and examine the issue of whether monetary policy moderate the relationship between inflation rate and corporate debt. Second, the article examines the issue of the moderating role of monetary policy on the relationship between interest rate and corporate debt.


Capital Markets Review Vol. 29, No. 1, pp. 17-39 (2021)

Does Entropy Index Explain the Determinant of Capital Market Integration in ASEAN?

Ignatius Roni Setyawan1 & Buddi Wibowo2
1Faculty of Economics and Business, Tarumanagara University, Indonesia
2Faculty of Economics and Business, Universitas Indonesia, Indonesia

Abstract: Research Question: This study will examine whether the entropy index by Ruefli (1990) could become the main determinant of capital market integration in ASEAN. Motivation: Continuing the study of Pretorius (2002) and Bracker and Koch (1999) who successfully used the correlation equation model to explore the capital market integration determinants in several regions, this study utilizes the correlation method to identify some new determinant of the capital market integration in ASEAN such as level of intra industry competition and intensity of role of global investors. Idea: This study is proposed a new thinking in the capital market integration i.e. when the capital market is integrated so thus there is no relevant for international diversification; but it will shift to the industrial diversification. Data: This study needs not only four data years 2006-2009 but also requires 10 industrial groups from the Global Industry Classification Standard (GICS) version from OSIRIS toward 5 ASEAN countries hence we obtain 240 data observations in order to employ SUR. Especially 10 industrial groups from GICS is used to estimate entropy index by Ruefli (1990) for each industry. Method/Tools: We must use SUR (Seemingly Unrelated Regression) and for estimation process is compliance to Zellner’s assumption that there should be a contemporaneous correlation of error from each equation of 5 ASEAN countries. Findings: We find that the entropy index of Ruefli (1990) is proven as an effective proxy for level of intra industry competition which functions as primary determinant of capital market integration in ASEAN. While the other finding is some stock market such as Malaysia looks so restrictive towards the existence of global investors. The finding confirms the result of Mitchell and Joseph (2010) and Omay and Iren (2019) about the strict foreign exchange control regime in Malaysia. Contribution: We are probably one of the market integration studies that obtain industrial structure becomes the main determinant of market integration through entropy index and we reconfirm the studies of Faff and Mittoo (2003), Roll (1992), Pretorius (2002), Carrieri et al. (2004) and Hwang and Sitorus (2014) which has considered about industry factors.


Capital Markets Review Vol. 29, No. 1, pp. 41-58 (2021)

ASEAN-5 and Indian Financial Market Linkages: Evidence from Cointegration and Factor Analysis

Ritesh Patel1
1Institute of Management, Nirma University, India.

Abstract: Research Question: How the ASEAN-5 and Indian markets are integrated with respect to pre and post 2008 financial crisis? Motivation: The past studies have not covered ASEAN-5 and Indian market. Further, the market integration has implication for portfolio diversification. This Puzzle is solved by adopting different investment portfolio options for pre- and post-crisis period. Majority of the past studies were conducted using weekly or monthly data but the present study is conducted using daily data to get results that are more robust. Idea: The core idea is that examining the portfolio diversification opportunity and integration among the markets with respect to pre- and post-crisis. The study focuses on whether the level of integration among the markets improved after the crisis or not. Data: The study is performed covering a data from January 1, 1998 to 30 March 2020. A period from January 1, 1998 to June 30, 2008 is denoted as Pre-crisis period and a period from January 1, 2009 to March 30, 2020 is taken as a post-crisis period. The data of indexes are taken from database. The study is performed on the five original ASEAN members (Indonesia, Malaysia, the Philippines, Singapore, Thailand) and India. Method/Tools: The study is performed using Correction, Unit Root Test, Granger Causality Test, Johnsen Cointegration Test and Factor Analysis. The study has adopted descriptive research design. Findings: The outcome of the study reveals that after the financial crisis, the markets become more integrated with each other and hence the portfolio diversification opportunity is reduced for the investors as compare to pre-crisis period. The investors can diversify their investment portfolio to the relevant market. Further, the government can consider the level of integration to draft monetary and macroeconomic policies. Contributions: This study add latest findings to the literature review as it considers the 2008 global financial crisis for study and the study is conducted by considering the data till March 2020. It provides implications for Investors, government and MNCs.


Capital Markets Review Vol. 29, No. 1, pp. 59-72 (2021)

Noise Trader Risk-Evidence from China’s Stock Market

Liang Ye1 & Yeng-May Tan1
1School of Economics and Management, Xiamen University Malaysia, Malaysia.

Abstract: Research Question: This paper examines the prevalence of noise trading and volatility asymmetry in the Chinese stock market. Motivation: Noise trader risk is a pervasive risk in the world’s stock markets. It is driven by emotions and run counter to market stability. Noise trading has its practical repercussions. Hence, it is imperative for policymakers and investors to understand the behaviour and causes of noise risk to enhance market efficiency and optimize the financial decision-making process. Although most studies have confirmed the existence of noise in China’s stock market, the volatility response findings have been mixed. Besides, prior studies found that China’s stock market’s volatility response behaves differently from its Western counterparts. Idea: In an attempt to examine the asymmetrical volatility response over different market conditions, we build our study on Feng et al. (2014) but over a different market sentiment period. Additionally, we combine our quantitative research with qualitative analysis. Hence, our paper verifies the existence of noise trading in China’s stock market and dissects the plausible rationales behind the findings, keeping China’s unique historical developments and market conditions in mind. Data: Our sample data comprises the daily Shanghai Stock Exchange (SHSE) A-share index between 2nd January 2014 to 1st July 2019. Methods: We first employ a variance ratio method to test for noise trading evidence and subsequently develop an EGARCH-M model to detect yield asymmetry in the SHSE A-share market. Findings: Our result suggests that noise trading is prevalent in China’s stock market and that market returns are more volatile in the face of good news than bad news. Hence, our findings are similar to Chen and Huang (2002) but contradict Feng et al. (2014). We attribute our findings to the investor’s irrational investment psychology and behaviour, such as the widespread “catch up and kill down” operations among the noise traders and the market’s deficiencies. Contributions: Hence, our results provide important indications to investors and policymakers to assess the market conditions and devise optimal strategies.


Updated on 14 June 2021