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The secondary market

allows those share owners to reduce holdings of unwanted shares and purchasers to acquire the stock

Sponsored ADRs

are created by a bank at the request of the foreign company that issued the underlying security

When conducting a trade in the secondary market, public buyers and sellers are represented by an agent, known as a

broker

Foreign stocks can be traded directly on a national stock market, but frequently they are traded in the form of a

depository receipt

An American Depository Receipt (ADR)

is a receipt representing a number of foreign shares that remain on deposit with the U.S. depository's custodian in the issuer's home market-First ADRs began trading in 1927

Limit order

is an order away from the market price that is held in a limit order book until it can be executed at the desired price

Market order

is executed at the best price available in the market when the order is received, that is, the market price

Order submitted to broker may be a

market or limit order

Investors who buy shares from the issuing firm in the primary market

may not want to hold them indefinitely

Yankee stock

offerings are sold directly to U.S. investors by foreign companies

Cross-listing

refers to a firm having its equity shares listed on one or more foreign exchanges, in addition to the home country stock exchange

In an agency market

the broker takes the client's order through the agent, who matches it with another public order

In a dealer market,

the broker takes the trade through the dealer, who participates in trades as a principal by buying and selling the security for his own account

Unsponsored ADRs

were usually created at the request of a U.S. investment banking firm without direct involvement by the foreign issuing firm

A liquid stock market is one in which investors can buy and sell stocks quickly at close to the current quoted prices

-A measure of liquidity for a stock market is the turnover ratio, calculated as the ratio of stock market transactions over a period of time divided by the size, or market capitalization, of the stock market -Generally, the higher the turnover ratio, the more liquid the secondary stock market, indicating ease in trading -In 2018, many national stock exchanges had relatively high turnover ratios, with close to 40% of the exchanges in excess of 30% turnover on average

Investors would have difficulty diversifying their investments in concentrated markets, those dominated by a few large firms

-Concentrated financial markets also represent poor access of firms to the stock market -A common measure of stock market concentration is the ratio of the market capitalization of the largest ten companies divided by the total market capitalization •In 2018, the largest ten companies on the Budapest Stock Exchange accounted for a whopping 95.46% of the total market capitalization of the stock exchange •Alternatively, also in 2018, the London Stock Exchange had a much lower concentration ratio of 29.38%

Which factors influence equity returns?

-Macroeconomic factors -Exchange rate

Approximately 80 major national stock markets

-Western and Eastern Europe once had more than 20 national stock exchanges where at least 15 different languages were spoken -Possibly, over time a European stock exchange will eventually develop; however, a lack of common securities regulations, even among the countries of the European Union, hinders this development

Secondary equity markets of the world serve two major purposes:

1.Provide marketability 2.Provide share valuation

A firm may cross-list shares for many reasons:

1.Provides a means for expanding the investor base for a firm's stock, thus potentially increasing its demand 2.Establishes name recognition of the company in a new capital market 3.Brings the firm's name before more investor and consumer groups 4.May be a signal to investors that improved corporate governance is forthcoming (if cross-listing into developed capital markets with strict securities regulations and information disclosure requirements) 5.May mitigate the possibility of a hostile takeover of the firm

Three factors appear to be fueling the sale of Yankee stocks

1.Push for privatization by many Latin American and Eastern European government-owned companies 2.Rapid growth in economies of developing countries 3.Large demand for new capital by Mexican companies following approval of NAFTA

International Equity Market Benchmarks

As a benchmark of activity or performance of a given national equity market, an index of the stocks traded on the secondary exchange (or exchanges) of a country is used

Solnik (1984) found that international monetary variables had only weak influence on equity returns in comparison to domestic variables

Asprem (1989) found that changes in industrial production, employment, and imports, the level of interest rates, and an inflation measure explained only a small portion of the variability of equity returns for ten European countries, but that substantially more of the variation was explained by an international market index

Market Capitalization

At year-end 2018, total market capitalization of the 80 organized stock exchanges tracked by the World Federation of Exchanges (WFE) stood at $74,667b

Gupta and Finnerty (1992)

Concluded that exchange risk is generally not priced

Adler and Simon (1986)

Found changes in exchange rates generally explained a larger portion of the variability of foreign bond indexes than foreign equity indexes

Eun and Resnick (1988)

Found that the cross-correlations among major stock markets and exchange markets are relatively low, but positive

Depository receipts (DR) market has grown significantly over the years

In 2018 alone, $15b was raised through 49 DR offerings

There are two types of ADRs:

Sponsored ADRs Unsponsored ADRs

Five largest stock exchanges at end of 2018:

•New York Stock Exchange (NYSE) •NASDAQ •Japan Exchange Group •Shanghai Stock Exchange •Hong Kong Exchanges and Clearing