Emerging Market Finance

Professor Zhiwu Chen
ICF, room 204

203 432-5948
Yale School of Management

TAs for the course:  Deniz Yavuz n and Wenzhong Fan

Meeting times: 10:00am - 11:20am, T & TH, room B60
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Click here for all course-related announcements. Please check this page frequently for course updates.

PPT files for the lectures are provided below:

1. PPT file for Lecture 1 is here.

2.  PPT file for Lecture 2 is here.

3.  PPT file for Lecture 3 is here.

4.  PPT file for Lecture 4 is here (on Turkey and Latin America).

*  Added lecture on the emergence of the U.S. mortgage market: a case study

5.  PPT file for Lecture 5 is here.

6.  PPT file on Asian Financial Crisis is here.

7.  PPT file on Lecture 6  is here.


9.  PPT file on Lecture 7  is here (Emerging Market P/E).

10.  PPT file on Lecture 8  is here (Project Valuation and Cost of Capital for Emerging Markets).

11.  PPT file on Lecture 9  is here (Valuation by adjusting cash flow  for Emerging Markets).

12.  PPT file on Lecture 10  is here (The Real-Option Valuation Approach for Emerging Markets).

13.  PPT file on Lecture 11  is here (Valuation of Illiquid Securities in Emerging Markets).

14.  PPT file on Lecture 12  is here (Why Listing Overseas?).

Nov. 18:  Speaker:  Mr. Satyen Mehta, Managing Director, Neon Liberty Capital Management (emerging market fund management firm), and formerly with JP Morgan Investment Management.  Mr. Mehta founded the JP Morgan Emerging Market Fund group in 1990 and directed the group until his recent departure to start Neon.  Here is an outline of  his presentation.

* Nov. 20: Speaker Mr. Brian Tang, Senior Associate at Sullivan & Cromwell, to speak on Legal Issues in Emerging Market Finance & Investments. The PPT file is here for downloading.

15.  PPT file on Lecture 13  is here (Emerging Market Debt). and PPT file on debt enforcement history.

16.   PPT file on Lecture 14  is here (Emerging Market Corporate Debt).

The course covers essential elements of emerging financial markets, how markets are developed and how securities are valued and traded. The perspective is that of both a corporate manager and the investment manager (responsible for investment portfolios of insurance companies, banks, pension funds, mutual funds, endowment funds, and personal trusts). Certain policy issues will be discussed concerning emerging market development. What we cover in this course has obvious implications for asset allocation and security selection strategies. We discuss several outstanding problems of emerging market investment, including corporate governance, market institutional development, political risk, speculative craze, and performance measurement. We will also cover emerging market security valuation, portfolio diversification, project finance, and venture capital. The objective here is to train highly skilled financial analysts and managers with strong theoretical background and practical knowledge about emerging markets.

Suggested textbook: Beim and CalomirisEmerging Financial Markets (McGraw-Hill Irwin 2001).
Casual background Reading:

Background Reading: Malkiel and Mei, Global Bargain Hunting (Touchstone 1998, out of print, but you may order used ones on Amazon.com).

Internet Resources:

1.Emerging Market Corporate Finance by Prof. Cam Harvey (I have incorporated some of Prof. Harvey's material in my course)

2.Jianping Mei's "Emerging Market Finance" links (I have incorporated some of Prof. Mei's material in my course) 

Thanks also go to Prof. Wei Li at the University of Virginia, as I have adapted some of his course materials. 

It is the most important that students keep up to date with the reading for the course. The course grade will be based on class participation (20%),  five group cases (each worth 12%), and a final review essay (20%). Done individually (not as a group), the final review essay should be 8 pages or longer, on any subject related to the course or just reviewing the materials covered in the course.

Each case group should consist of 3 to 4 students working together. For each case, I will pre-select one group presenting in class and leading the case discussions. The presenting group must prepare PPT presentations before the scheduled class and coordinate the content focus. Each member in the presenting group must be responsible for one part and take turns in the presentation. Each case report should be 6 pages or longer (double-spaced). You should write each case report and presentation with an investment committee as your audience (to convince them about your proposals and interpretations).

Lecture 1: Macroeconomic overview of world markets

Assigned readings:

  1. Beim and Calomirisi, chapters 1 and 2 (required).
  2. Mobius, Part I
  3. William Goetzmann and P. Jorion, "Re-emerging Markets" http://papers.ssrn.com/sol3/papers.cfm?abstract_id=7704
  4. William Megginson and Jeffrey Netter, "From State to Market: A Survey of Empirical Studies on Privatization" Journal of Economic Literature 2001, PDF.
  5. HBS Case #9-701-076, "Russia: The End of a Time of Troubles", May 2001.
Lecture 2: Return And Volatility: emerging markets

Emerging Market equity returns, return distributions, and the general evidence of market volatility, and examine short- vs. long-term correlations of various different markets. We will also discuss alternative measurement of risk and the impact of speculation on volatility.

1. Campbell R. Harvey, "The Making of an Emerging Market," with Claude Erb and Tadas Viskanta, Emerging Markets Quarterly (1997) 1:1 14-19.  View PDF, 0.7mb.[Required]

2. Bekaert, Erb, Harvey, and Viskanta,

"Distributional Characteristics of Emerging Market Returns and Asset Allocation," Journal of Portfolio Management (1998), Winter, 102-116. PDF(Required)

3. Ghysels, Eric and Mouna Cherkaoui, "Emerging Markets and Trading Costs," (a case study of the Casablanca Stock Exchange), Pennsylvania State University and CIRANO.

4. Bris, Arturo, William Goetzmann and Ning Zhu, "Efficiency and the Bear: Short Sales and Markets around the World," Yale School of Management.

Lecture 3: Country in focus: China and the East Asia financial crisis

1. Anthony Neoh, "China's domestic capital markets in the new millennium" Word File

2. Laura Cha, " The Future of China's Capital Markets and the Role of Corporate Governance" Word File (Required)

3. The Myth of Asia's Miracle by Paul Krugman(Required)

4. Ramesh Thakur, " China is outperforming India", International Herald Tribune, Jan. 7, 2003, (Required)

5. Mobius, chapters 3, 4 and 5.
6. Michael Pomerleano, 1999, The East Asia Crisis and Corporate Finance, Emerging Market Quarterly.PDF(Required, a great article)

7. CRAIG KARMIN, "Some Believe Best Route To China Is Indirect One", THE WALL STREET JOURNAL, January 2003.

8. Campbell R. Harvey and Andrew Roper, "The Asian Bet,"  in Alison Harwood, Robert E. Litan and Michael Pomerleano, Eds., The Crisis in Emerging Financial Markets, Brookings Institution Press, 1999, pp. 29-115. View PDF of last working paper version [Required, this is a great survey and overview of Asian emerging markets.]

9. Zhiwu Chen, "Freedom of Information and the Economic Future of Hong Kong", Yale School of Management.

10. The New York Times' Timeline of China's past 50 years (with the titles of various NYT articles on key events).

11. Freedom's in 2nd Place? By NICHOLAS D. KRISTOF, The New York Times, Aug. 29, 2003. (Interesting article comparing China, Ukraine and Russia).

Lecture 4:Country in focus: Turkey and Latin America

PPT file for Lecture 4 is here (on Turkey and Latin America).

Speaker:  Dr. Frank Warnock, Economist at the International Finance Division of the Federal Reserve Board, to speak on emerging market debt, on Sept. 25 and in room B74. For his background and readings, visithttp://www.georgetown.edu/faculty/few2/index.html#bio .

Lecture 5: Necessary institutions of capital markets: why is it difficult to develop them?

  1. Morck, Randall, Bernard Yeung, and Wayne Yu.(2000)."The Information Content of Stock Markets: Why Do Emerging Markets have Synchronous Stock Price Movements?" Journal of Financial Economics, PDF. (Required)
  2. Utpal Bhattacharya and Hazem Daouk , "The World Price of Insider Trading ", Journal of Finance, 2000. 
  3. Rafael La Porta; Florencio Lopez-de-Silanes; Andrei Shleifer; Robert W. Vishny, "Law and Finance", The Journal of Political Economy, Vol. 106, No. 6. (Dec., 1998), pp. 1113-1155. (Required)
  4. Rafael La Porta; Florencio Lopez-De-Silanes; Andrei Shleifer; Robert W. Vishny, " Legal Determinants of External Finance", The Journal of Finance, Vol. 52, No. 3. 
  1. Beim and Calomiris, chapter 4 (required).

Case 1 due and discussion: Sept. 23
McGraw-Hill Case: Peregrine Investments (this case comes with the textbook: how did the hottest securities firm in East Asia crash in 1997?).
Questions for this case are included here.

Lecture 6. Corporate Governance Issues in EM

  1. Campbell R. Harvey, "The effect of capital structure when expected agency costs are extreme," with Karl Lins and Andrew Roper, PDF (Required)
  2. "Global Bargain Hunting" by Burton Malkiel and J.P. Mei (Touchstone): Chapter 3 & 4
  3. Grishchenko, Litov and Mei, Private Information Trading and Corporate Governance In Emerging Markets, PDF (Required)
  4. Andrei Shleifer; Robert W. Vishny, "A Survey of Corporate Governance ", The Journal of Finance, Vol. 52, No. 2. (Jun., 1997), pp. 737-783.
  5. Beim and Calomiris, chapter 5 (required).
  6. Stijn Claessens and Joseph P.H. Fan, 2002, Corporate Governance in Asia: A Survey, View temporary PDF.[Required]
  7. Stijn Claessens, Simeon Djankov, and Larry Lang, 2000, "East Asia Corporates: Growth, Financing and Risks Over the Last Decade,", Emerging Markets Quarterly View temporary PDF.

Managing Political Risk

1. Jianping Mei and Limin Guo, 2002, "Political Uncertainty, Financial Crisis, and Market Volatility". (Required)
2. Campbell R. Harvey, Claude Erb and Tadas Viskanta, "Expected Returns and Volatility in 135 Countries"  Journal of Portfolio Management Spring 1996, pp. 46-58. (P36) PDF (Required)
3. Wilshire Associates, "Permissible Country Equity Investment Analysis and Recommendations", April 1999. PDF (Required)
4. Paolo Mauro, "Why worry about corruption?" Economic Issues No. 6, IMF, 1997. (Required)

Case 2 due and discussion: Oct. 7

HBS Case #296-084: Hostile Bid for Red October(Required)

--- Questions for this case are included here.

Lecture 7. Valuation Issues in Emerging Markets

  1. "Valuation in Emerging Markets", McKinsey Quarterly 2000, number 4. PDF.(Required)
  2. Tsingtao Breweries: Valuation with Changing ROE... by Aswash Damodaran (Required)
  3. Emerging Market PE Ratios: 2000 by Aswash Damodaran (Required)
  4. Campbell R. Harvey, Stock Selection in Emerging Markets (PM24) PDF
Enrico C.Perotti and Ibolya Schindele, Pricing Initial Public Offerings in Premature Capital Markets: The Case of Hungary, University of Amsterdam and University of Amsterdam, 2002.

Lecture 8: Cost of Capital and Asset Valuation

We will discuss the determination of cost of equity capital for Emerging Market investment, followed by a review of valuation techniques used to assess cross-border investments. We will then cover the discounting of free cash flows with a weighted average cost of capital and the use of adjusted present value.

1. Campbell R. Harvey, "The International Cost of Capital and Risk Calculator," PDF(Required)

2. Kent Hargis, The Goldman Model of Equity Cost of Capital, PDF(Required)
3. Rene Stulz, The globalization of equity markets and the cost of capital, PDF.
4. Ravi Jagannathan and I. Meier, Do we need the CAPM for capital budgeting?, PDF.

Lecture 9. Real Options in Emerging Market Project Valuation

1. "The Real Power of Real Options", McKinsey Quarterly 1997 No. 3: PDF(Required)

2."Making Real Options Real", McKinsey Quarterly 1998 No. 3: PDF.

3.Black-Scholes options pricing software, Download excel.
4.Campbell R. Harvey, Identifying Real Options, View HTML(Required)

Case 3 due and Discussions: Oct 28

HBS Case: The Chad-Cameroon Petroleum Development and Pipeline Project (A) (HBS: N-202-010) (project finance). Check out Ben Esty's excellent project finance portal for related literature.
--- Questions for the Chad-Camerron case are included here.

An alternative case to work on is HBS Case: Financing the Mozal Project, by Benjamin C. Esty and Fuaad A. Qureshi. This project is a $1.4 billion aluminum smelter project in Mozambique. This case is designed for people with an interest in capital investments in emerging markets. It presents an extreme example of political risk in a developing country and shows how project sponsors attempt to mitigate the risks through project selection, structuring, and insurance.
--- Questions for the Mozal Project case are included here.

Related reading: HBS Study: An Overview of Project Finance (HBS: N9-200-028) PDF (Required).

Lecture 10. Valuation of Illiquid Stocks in Emerging Markets

1. Zhiwu Chen and Peng Xiong, " Discounts On Illiquid Stocks: Evidence From China" (a study of the price discounts on the non-tradable Institutional Shares issued by Chinese public companies.), Yale School of Management, 2001. (Required)

2. Silber, William L., 1991, “Discounts on Restricted Stock: The Impact of Illiquidity on Stock Prices,” Financial Analysts Journal, July-August 1991, 60-64. (Required)

Lecture 11: Exit Strategy for Emerging Market Investments: where to go IPO?

  1. Mark Grinblatt and Matti Keloharju , "Incl. Electronic PaperDistance, Language, and Culture Bias: The Role of Investor Sophistication",

  2. University of California, Los Angeles and Helsinki School of Economics & Business Administration, May 2000. (Required)
    2. Joshua Coval and Tobias Moskowitz, "The Geography Of Investment: Informed Trading And Asset Prices", Journal of Political Economy, Vol. 109, August 2001.
  3. Gur Huberman, "Familiarity Breeds Investment," Columbia Business School, December 1999. (Required)
  4. Andrew Karolyi, Why Do Companies List Their Shares Abroad? (an excellent Survey of the Evidence and its Managerial Implications), Volume 7, Number 1, Salomon Brothers Monograph Series, New York University, January 1998, 60 pages.

Case 4 due and Discussions: Nov. 11

HBS Case: Infosys: Financing an Indian Software Start-Up, by Walter Kuemmerle and William J. Coughlin.
This case describes the financing and growth of Infosys, an Indian software start-up. The company must decide whether it should seek to also list its shares on a U.S. stock exchange and, if yes, whether to list on NASDAQ or NYSE.
--- Questions for the Infosys case are included here.

Alternatively, you can work on the HBS case:  SOHO China, a Chinese real estate company planning to do an international listing.  --- Questions for the Soho China case are included here.

Lecture 12: Emerging Market Bonds 

This lecture extends the z-score model to estimate the credit quality of emerging market corporate debt. We will then show how fixed income securities work and how they are valued. We will focus on the Brady bond market. We will then examine the relationship between credit risk and bond yields.

1. Emerging Market Corporate Bonds—A Scoring System, by Ed Altman (Required)
2. Risk Premiums for Other Markets, Download(Required)
3. Moody's Moody's, S&P Ratings, PDF

Lecture 13: Corporate Bond Valuation in the absence of a reliable bankruptcy court

(Materials will be provided in a PPT file)

* Nov. 18:  Speaker:  Mr. Satyen Mehta, Managing Director, Neon Liberty Capital Management (emerging market fund management firm), and formerly with JP Morgan Investment Management.

  Here is an outline of  his presentation.

Case 5 due and Discussions: Dec. 4

McGraw-Hill Case: Gazprom (equity valuation case that comes with the textbook)

--- Questions for the Gazprom case are included here.

Lectures 14 and 15: Rounding it up: how do you put together a portfolio? -- Investment Strategies

This lecture will begin by studying various ways of gauging valuation levels of emerging markets. We will discuss the Smith Barney Global Asset Allocator Model and its performance. The application of this model in a single market is also discussed. We will also demonstrate how momentum strategies may be applied to achieve market outperformance. We will then discuss performance evaluation issues of emerging-market funds.

1. Geert Rouwenhorst, "International Momentum Strategies" Journal of Finance 53, 1998, 267-284. PDF.(Required)
2. E. Fama and K. French, "Value and Growth: The International Evidence", Journal of Finance, December 1998, PDF(Required)
4. Yasushi Hamao, Jianping Mei, and Yexiao Xu, Idiosyncratic Risk and Creative Destruction in Japan, PDF(Required

Suggestions on the Cases

You should start forming your group immediately. Use the tools taught in the course (such as valuation, country risk analysis, cost of capital models, project valuation, etc), but even if we have not covered a specific subject before a case you should still be able to work on it because most basic tools and theories have been covered in other finance courses that you have taken. Do not underestimate the time committment to each case, and figure out the time committment of all of the group members in advance.

Writing an analysis report and explaining your proposed solutions will always be a critical part of your future job. Convincing others to accept your proposal/idea is not easy. Thus, working on the cases is a good way to both learn about emerging markets and prepare for your future career. You can find a sample of cases (especially the PPT presentation slides) written by Duke Students at http://www.duke.edu/~charvey/Classes/ba4xx/project_groups_2002.htm

Data resources

1. Global Macroeconomic and Financial Policy Site by Nouriel Roubini

2. J.P. Mei's "Emerging Market Finance" Data Source