Ok this is the deal - I cannot open my books at work …cannot stand anymore comments from coworkers about how I slack 
…but I am unable to stop thinking about exam… I was wondering if we can take one concept at a time and just review the kep points. ONLY KEY POINTS. No need to overthink…easy ones… and all of you who open the book are free to do so 
Lets begin with Emerging Markets Finance (thats what comes to my mind now). I know there are 3 LOS… lets start with this --> Difference between Market Integration and Liberalization (atleast 3 key points)… who wants to go… bullets preferred !!
to be fair - i think with all the other posts that keep coming up that are quesiton oriented, we are reviewing the key concepts of a lot of material. that’s why i keep coming back here at least. Its a nice refresher to material i’ve forgotten, overlooked, or plain just don’t care about.
Actually… I’d like some clarification on Liberalization v.s Integration myself. I get the fact that if a country is liberalized, it doesn’t automatically mean they are integrated. So would love to clarify the differences and their impacts.
Freshie - I would recommend the Secret Sauce book by Schweser - it has ALL this stuff in it. ALL 6 CFA books boiled down to about 247 pages… Not to deflect - BUT its worth the price. All the LOS would create a pretty long and unmanagble thread. I think a neat format for next year (hopefully not for us) is that there would be multiple subforums under Level III - these forums could be be reading or Study Session.
Liberalization: example: THe market is more open to foreign investment (less goverment interventaion) Integration: The market actually gets foriegn investment and becomes more ‘correlated’ with other markets. The concepts are related but not necessarily the same.
liberalization deals with opening up a country’s markets via policies (i.e lower tarrifs, tax) etc. Liberaliztion tends to positively effect a coutnries growth, and capital flows in as a result (increasing returns) and the ability to diversify ones portfolio. integration deals with the idea that similar assets should have the same return. just because a market is liberalized it does not mean it is fully intergrated in the world markets for reasons that i’m not 100% sure on. I understand that due to the risks of emerging markets that liberalization doesn’t remove all those risks (political being a main one) and therefore liberalization doesn’t necessarily lead to integration which would be similar assets are priced the same.
Thanks so much Data Monkey… My point was not to go over all the LOS… I like to get some concepts fully squeezed in my head especially the ones that are sort of confusing… I thought knowing 3 or 4 points in those concepts that comes to my brain can help…Some sort of studying!!
Beauty… Also, am I correct in saying that only when integration has taken place with the foreign security asset be priced according to risk in the context of the global portfolio rather than independent risk? What I mean is when markets are not integrated, the risk of a security in a foreign market tends to be based not on the risk it adds to the portfolio but rather it’s stand alone risk.
PJ - if i follow your question and understand it properly, i believe you are correct.
A country may have a liberalized market but there could still be barriers that keep it from being integrated (i.e. restrictions on foreign investors). I think if a company had high tariffs, it could still be liberalized but have a harder time being integrated since it would be more expensive for other countries to trade with it.
Not 100% sure, but liberalization is definitely a policy and tax/tarriff law issue. Get the government out of private enterprise and promote free flow of trade and financial products. There is an additional question about whether global investors will treat a recently liberalized economy as if it is equivalent to any other developed and liberalized market. So for a while, a country may have dynamics of its own, even if it is liberalized, perhaps because investors are worried about relapse to nationalizations and old tax policies, or maybe they’re worried about civil war or that the US will decide to invade for no apparent reason (jk, sorta). In this case, the separate dynamics of markets in that country would suggest that markets aren’t integrated yet. The big test of integration, IIRC from L2 stuff, is whether the risk free rates in different countries move more or less in parallel with the rest of the world. (not necessarily CFA kosher, but that’s how I understand it).
bchadwick Wrote: ------------------------------------------------------- > Not 100% sure, but liberalization is definitely a > policy and tax/tarriff law issue. Get the > government out of private enterprise and promote > free flow of trade and financial products. > > There is an additional question about whether > global investors will treat a recently liberalized > economy as if it is equivalent to any other > developed and liberalized market. So for a while, > a country may have dynamics of its own, even if it > is liberalized, perhaps because investors are > worried about relapse to nationalizations and old > tax policies, or maybe they’re worried about civil > war or that the US will decide to invade for no > apparent reason (jk, sorta). In this case, the > separate dynamics of markets in that country would > suggest that markets aren’t integrated yet. > > The big test of integration, IIRC from L2 stuff, > is whether the risk free rates in different > countries move more or less in parallel with the > rest of the world. > > (not necessarily CFA kosher, but that’s how I > understand it). It was my understanding that liberalization was due to firm privatization and bank reform while integration was due to more freely flowing capital in and out of the country, higher information, investor protection and accounting standards.
that sounds correct
Thanks Striker… Question on- Impact of integration on Prices. Let me know if my understanding right (this reading to me is very abstract) When a country / govt announces liberalization, or when it is anticipated the prices move up but why should the expected return decrease ? Sorry if I am missing anything obvious… please someone explain ?! strikershank Wrote: ------------------------------------------------------- > liberalization deals with opening up a country’s > markets via policies (i.e lower tarrifs, tax) etc. > Liberaliztion tends to positively effect a > coutnries growth, and capital flows in as a result > (increasing returns) and the ability to diversify > ones portfolio. > > integration deals with the idea that similar > assets should have the same return. just because a > market is liberalized it does not mean it is fully > intergrated in the world markets for reasons that > i’m not 100% sure on. I understand that due to the > risks of emerging markets that liberalization > doesn’t remove all those risks (political being a > main one) and therefore liberalization doesn’t > necessarily lead to integration which would be > similar assets are priced the same.
expected FUTURE return is aniticpated to decrease. say we know a stock is worth $100 but trades in a foreign country for $25. we expect a return of 300%. now, liberalization and integration occurs, the prices move up. the stock now trades at $50. so expected future return is only 100%.
expected return should decrease once integration occurs because now the stock is priced not on stand alone risk but on the risk it adds to the portfolio. Given covariance/correlation < 1, it will add less risk to the portfolio than had it been held all on its own. Therefore, lower expected risk = lower expected return.
integration= assets of similar risk should give similar return
Thanks all of you ! Ok I learned something today… now back to work… I will post some other concept to learn when and if I get a chance… Thanks!!!