Determinants of Financial Security in Securities Markets: Panel Data Evidence from Emerging Economies

Abstract Financial market stability in emerging economy securities markets has been historically compromised by low volatility, a high susceptibility to global shocks, and institutional weaknesses. With these markets increasingly integrated into the global financial system, stability at both the asset level and system level has become a top priority of policymakers and investors alike. Although previous studies investigate the asset level risk, systemic financial stress, or the institutional quality associated with financial stability, none of them takes a designed joint setting that could enable us to understand both types of interactions that may drive the financial stability. This research bridges that gap through the increasingly widely utilized integrated analytical framework. This research employs asset-level downside risk measures based on parametric Value at Risk (VaR) derived from panel data of a sample of emerging economies. We capture systemic instability by building a composite Financial Stress Index using Principal Components Analysis; and we use Structural Vector Autoregression models to analyze the transmission of domestic and external shocks. The results show that domestic macroeconomic imbalances and global financial shocks are the key contributors to financial tumult in emerging securities markets. Also, average performance measures fail to recognize the substantial tail risk among asset returns. The results also suggest that higher institutional quality, in terms of political stability, bureaucratic quality, and effective protection of property rights, is associated with lower financial stress. Foreign investment inflows and remittances help with market liquidity, and they act as shock absorbers in times of crisis. Furthermore, market development mechanisms in countries with widespread share issue privatization also make them more resilient to financial shocks. In any case, the study showed that emerging securities markets are financially stable not because of short term performances in the market but because of the interrelation of effective risk management, macroeconomic policies, and institutional strength.