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November 28, 1999
DEFINING ISRAEL`S ECONOMY AS AN ADVANCED ECONOMY AND AN
EMERGING ECONOMY ACCORDING TO THE VOLATILITY OF SHARE PRICES
In the last decade share prices in Israel had a volatility of 34 percent,
compared with 20 percent in the advanced economies and 54 percent in
the emerging economies.
The Bank of Israel`s Monetary Department advises that since the beginning of 1997 Israel`s economy has been counted in the group of countries referred to as "emerging economies" by the International Finance Corporation (IFC), an organization belonging to the World Bank, and by the investment bank Morgan Stanley. As a result, these institutions included data from Israel in the share indices of emerging economies. Such indices help the large international institutional investors in their investment decisions. Thus, for example, US pension funds would decide to invest a certain part of their assets portfolio in stock markets of emerging countries, and this would generally be managed by investment houses specializing in this sphere. The performance of these specialist investment companies is generally assessed by comparison with the share price index of emerging economies. Some investment in Israels stock market by nonresidents is performed in this manner. According to the IFC definition, and in reports of foreign investment houses, Israel, despite the process of reform of the money and capital markets, including liberalization of the foreign-currency market, is defined as an emerging economy, mainly because of countrys geopolitical situation and the low level of liquidity in the Tel Aviv Stock Exchange (TASE). The TASE has a low level of negotiability and few market players, it lacks market depth, and therefore exhibits relatively high volatility in share prices. The Monetary Department explains that share price volatility, measured by means of the standard deviation of the rate of change of the general real share price index (share prices after allowing for inflation), is regarded by foreign investors as representing the risk level. The Monetary Department notes that the volatility of share prices in Israel in the last decade was 34 percent, compared with an average of 20 percent in the advanced economies, and 54 percent, on average, in the emerging economies. Although the volatility in Israel is significantly lower than the average of the emerging economies, it The standard deviation provides an indication of the spread of share price indices over the last decade around the average share price index in that period. The standard deviation is calculated as the still lies within the range covering those countries, from 26 percent to 134 percent. It is also significantly higher than that in the industrialized countries, and higher than that in the advanced economy with the highest volatility, Norway, with 27 percent. s economy is on the dividing line םThe Monetary Department points out that Israel between advanced economies and emerging ones. This is because the volatility of share prices is only one of the factors relevant to the classification of a country in one category or the other. Among the other factors one could mention per capita income, the rate of inflation, stability of the exchange rate, etc. Thus, the International Monetary Fund (IMF) included Israel among the advanced economies at the beginning of 1996, s relatively high level of income. םdue inter alia to Israel The Monetary Department adds that for Israel to become like the group of advanced economies also using the criterion of efficiency of the financial markets requires supplementing trading in government bonds and improving the competitive structure of the financial services industry in Israel. This means encouraging stock market activity and boosting the general negotiability of securities, developments which will help lower the volatility of share prices in Israel. It must be stressed that the lower the degree of volatility, the more efficient and important the stock market will become as an instrument through which private corporations will raise capital.
Standard deviations of the annual rates of change of indices of real
- 1998 share prices in various markets,a 1989
a The division into advanced and emerging countries is that of international analysts. b The list includes both large and relatively small countries. c Standard deviation. d The average including Nasdaq is 21.2 percent. |
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Defining Israel's economy as an advanced economy
28/11/1999