Generally speaking, developing markets are referred to as `emerging markets'. This distinction between emerging markets and developed markets should be based on theoretical differences, between the two sets of markets on economic characteristics. However, in the literature, the distinction between the two has been adapted from the term as used by the World Bank. The term `emerging markets' arises from the description of emerging economies applied by the World Bank to low and middle income economies. If a country's GNP per capita did not achieve the World Bank's threshold for a high-income country, the stock market in that country was said to be emerging. More recently, this definition has proved to be less than satisfactory due to wide fluctuations in dollar-based GNP per capita figures. Dollar-based figures have been significantly affected by swings in exchange rates, especially in Asia. And reported GNP figures, since they take a significant time to prepare, are often out-of-date by the time they are released. Emerging markets should be distinguished based on a number of financial, economic and structural characteristics, for example, information efficiency and institutional infrastructure.
A stock market's institutional infrastructure is characterized by taxation of dividends and capital gains, restrictions on capital flows, and the quality of available information. Some of the important characteristics identified in the literature in differentiating markets are: Discriminatory taxation; Capital flow restrictions and market regulation; Liquidity; Market activity; Market size; and Market pricing.
The key characteristics of the emerging markets of relevance to international diversification are institutional infrastructure, market regulation, liquidity, market size and market pricing. However, academic and empirical research uses World Bank definition of the emerging markets and differentiates emerging markets from that of the developed markets based on this definition. Practitioners in the investment community also implicitly use this differentiation for the emerging markets.
|
