An empirical investigation of the impact of capital market liberalization on the Philippine equity market

by Unite, Angelo Africa

?bis thesis investigates the short- and long-tem effects of Phiiippiue capital market liberaiization on the domestic equity market and its relati0tlsh.p with intemationai equity matkets. We draw on concepts and theones of investment and intemationai finance for the economic intuition underlying these issues. Io Chapm 2 we examine the impact of Liberaikation on the de- of Philippine equity market integation. The results of mdtivariate cointeption analysis suggest that the Philippine stock market has become intepteci with the markets of its major economic partners durhg the pst-liberalization subperiod. However, we h d the degree of integration to be weak, possibly owkg to rernaining barriers to intemationai investments. These results are consistent with the notion that liberalization encourages international capital flows which in tum promotes capital market inteption. In Chapter 3, we iovestigate the response of Amexican investors to announcements of relaxation of Philippine intemaaonal investment restrictions, using First Phiüppine Fund data. The results of Our event study indicate that announced relaxation of foreign equity ownership limits are associated with a widening of the hind's discounts. One implication of this is that the imposition of foreign equity ownership restrictions effectively sepnted the Philippine equity market and raised the required re tum on Philippine equities. In Chapter 4, we examine the impact of liberaiization on the short-nui dynarnic relationships of the PMippine equity market with intemationai equity markets. Using a multivariate GARCH methodology, we find sipnincant lagged cross-market volatility spiliovers to the Philippine market, with srnager evidence in the pst-liberahtion subperiod. An analysis of the impulse response of conditional volatility reveais that the dynamic impact of pax foreign stock market rem innovations on curent volaOLity of Philippine stock market retums is quite persistent. These are consistent with the view that international investment barriers ùisulate the domestic market hm extenial shocks. By Liberahhg such restrictions, information contained in foreip stock market movements become an Unportant influence on the behavior of domestic stock market rem. Overail, our results suggst that ment capital &et libemlization in the Philippines may bave been partly responsible for increasing the price linkages of the domestic equity market with those of international markets. First of all. 1would üke to th& Steve Beveridge. my supervisor. for pmviding me with the impetus and research agenda for my dissertationand for sharing with me his expertise. 1 would a h Wre to extend my gratitude to Bob Korkie, Dick Beason, Denise Young and Ieuan Morgan for their invaluable comments and suggestions. I am likewise indebted to the Canadian Tnternational Development Agency (CIDA) and the Association of Deans of SoutheastGraduate Schools of Managemerit (ADSGM) for the full financial support they have given me during the entire duration of my doctoral studies. 1would also idce to thank Lydia Echauz, Jun T&o, buis Ranit, Pabs Mangam, Manny Sales, Remy Tamaca and Eva UmaL of De La Saile University - Manila for th& technical and moral support Finaily, 1 am forever gratehil to Raajini Sivakum, Janice Thomas, Nam~ata Malhotra, Jon Ritter, Gina and Shaun Malo, Auntie Sol and John Rennie. Jill. Irene and Guy Julian, Bob Hhhgs and Jeanette Gosine for their fkiendship. advice and comfon 1 would not have made it through the PhD Program without them.