**The Brazilian Stock Market – Dimension, Structure, and Main Features**

Ademir Clemente1, Marinês Taffarel2 and Robert A. Espejo3 *1Universidade Federal do Parana 2Universidade Estadual do Centro-Oeste 3Faculdade de Ciencias Sociais e Aplicadas do Parana Brazil* 

#### **1. Introduction**

220 Business Dynamics in the 21st Century

Varian, H.R. (1992). *Microeconomics Analysis*. Third Edition. W.W Norton & Company. New

Wooldridge, J. M. (2002). *Econometric Analysis of Cross Section and Panel Data*. Cambridge,

York.

MA: MIT Press.

Brazil has attracted the attention of investors around the world as it went through the 2008 financial crisis with relative ease, perhaps due to its history of successive internal economic crises that forced authorities to develop a specific know-how to manage them.

The objective of this chapter is to condense some basic information on the Brazilian stock market so as to enable investors to make a first decision in considering such a market, and to offer to other readers a consistent introduction.

First, a few lines are dedicated to positioning the Brazilian economy after the stabilization in 1994. Following this, a section presents the main institutions of the Brazilian stock market. The next 2 sections present its dimension and structure, respectively. In sequence, a brief discussion of the role of accounting information in determining prices and returns is inserted. The next section deals with corporate governance and highlights the *Novo Mercado*. Then, some final remarks are added.

#### **2. The Brazilian economic scenario**

Brazil, Russia, India, and China are emerging countries that constitute the group named BRICs, the world's fastest growing economies. By the 1970s, Brazil became the leading economy in Latin America due to its industrialization of natural resources and large labour pool. Brazil is the eighth largest economy in the world, the fifth largest country in terms of size, with an area of 8.5 million km2 distributed into 5 regions (Table 1).

The Northern region, which contains the State of Amazon, is the largest. Southern and Southeast regions are the least extensive and the most developed.

According to the Brazilian Institute of Geography and Statistics (IBGE), Brazil's population reached 190.8 million in 2010, representing a growth of 30% over 1991. Table 2 shows that population growth was much stronger in the less populous regions.

The Brazilian Stock Market – Dimension, Structure, and Main Features 223

Besides the population increase, life expectancy in Brazil rose from 62.6 years in 1980 to 73.4

Year Life expectation

Brazil's GNI per capita was 9,390 US Dollar in 2010 (World Bank, 2011). Table 4 shows the evolution of the purchasing power of the minimum wage in Brazil. Major changes occurred since it was established in 1940; however, there is a clear pattern of growth in the last 20

The regions and states present very different contributions to GDP and also very different

The Northern region has the largest land area and also the lowest share of GDP. The Northeast is the one with the lowest GDP per capita. In reality, the country faces serious internal disparities within its five regions. The Southeast region is in the upper range of human development, followed by the Southern and Central-west regions; however the 9 states located in the Northeast region present the lowest socioeconomic indexes. Disparities

After various unsuccessful plans, inflation was finally brought under control in 1994, but the stabilization process only ended in 1998. Therefore, the more significant available economic

are also important in relation to gender and ethnics countrywide (Tulane, 2011).

**Year Minimum wage Index**  1940 18.30 100 1950 13.82 76 1960 63.59 460 1970 44.44 70 1980 110.38 248 1990 81.24 74 2000 129.79 160 2010 280.02 216

1980 62.6 1985 64.7 1990 66.6 1995 68.5 2000 70.4 2005 71.9 2010 73.4

years in 2010 (Table 3).

Source: IPEADATA (2011) Table 3. Life Expectancy

Source: IPEADATA (2011)

Table 4. Purchasing Power of the Minimum Wage (USD)

levels of GDP per capita, as shown in Table 5.

years.


Source: IBGE (2011)

Table 1. Geographic Area by Region


Source: IPEADATA (2011)

Table 2. Brazilian Population by State (1,000)

Besides the population increase, life expectancy in Brazil rose from 62.6 years in 1980 to 73.4 years in 2010 (Table 3).


Source: IPEADATA (2011)

222 Business Dynamics in the 21st Century

Source: IBGE (2011)

Source: IPEADATA (2011)

Table 2. Brazilian Population by State (1,000)

Table 1. Geographic Area by Region

Region Area (1,000 Km2) % Northern 3,853.6 45 Central-west 1,606.4 19 Northeast 1,554.4 18 Southeast 924.6 11 Southern 563.8 7 Total 8,502.7 100

**STATE / REGION 1991 2000 2010 10/91(%)**  Parana 8,448.7 9,563.5 10,444.5 24 Rio Grande do Sul 9,138.7 10,187.8 10,693.9 17 Santa Catarina 4,542.0 5,356.4 6,248.4 38 SOUTHERN 22,129.4 25,107.6 27,386.8 **24**  Espirito Santo 2,600.6 3,097.2 3,515.0 35 Minas Gerais 15,743.2 17,891.5 19,597.3 24 Sao Paulo 31,588.9 37,032.4 41,262.2 31 Rio de Janeiro 12,807.7 14,391.3 15,989.9 25 SOUTHEAST 62,740.4 72,412.4 80,364.4 **28**  Distrito Federal 1,601.1 2,051.1 2,570.2 61 Goias 4,018.9 5,003.2 6,003.8 49 Mato Grosso 2,027.2 2,504.4 3,035.1 50 Mato Grosso do Sul 1,780.4 2,078.0 2,449.0 38 CENTRAL-WEST 9,427.6 11,636.7 14,058.1 **49**  Alagoas 2,514.1 2,822.6 3,120.5 24 Bahia 11,868.0 13,070.2 14,017.0 18 Ceara 6,366.6 7,430.7 8,452.4 33 Maranhao 4,930.3 5,651.5 6,574.8 33 Paraiba 3,201.1 3,443.8 3,766.5 18 Pernambuco 7,127.9 7,918.3 8,796.4 23 Piaui 2,582.1 2,843.3 3,118.4 21 Rio Grande do Norte 2,415.6 2,776.8 3,168.0 31 Sergipe 1,491.9 1,784.5 2,068.0 39 NORTHEAST 42,497.5 47,741.7 53,081.9 **25**  Acre 418.8 557.5 733.6 76 Amazonas 2,103.2 2,812.6 3,484.0 66 Amapa 289.4 477.0 670.0 131 Para 4,950.1 6,192.3 7,581.1 53 Rondonia 1,132.7 1,379.8 1,562.4 38 Roraima 217.6 324.4 450.5 107 Tocantins 919.9 1,157.1 1,383.4 50 NORTHERN 10,030.5 12,900.7 15,865.0 **58** 

Table 3. Life Expectancy

Brazil's GNI per capita was 9,390 US Dollar in 2010 (World Bank, 2011). Table 4 shows the evolution of the purchasing power of the minimum wage in Brazil. Major changes occurred since it was established in 1940; however, there is a clear pattern of growth in the last 20 years.


Source: IPEADATA (2011)

Table 4. Purchasing Power of the Minimum Wage (USD)

The regions and states present very different contributions to GDP and also very different levels of GDP per capita, as shown in Table 5.

The Northern region has the largest land area and also the lowest share of GDP. The Northeast is the one with the lowest GDP per capita. In reality, the country faces serious internal disparities within its five regions. The Southeast region is in the upper range of human development, followed by the Southern and Central-west regions; however the 9 states located in the Northeast region present the lowest socioeconomic indexes. Disparities are also important in relation to gender and ethnics countrywide (Tulane, 2011).

After various unsuccessful plans, inflation was finally brought under control in 1994, but the stabilization process only ended in 1998. Therefore, the more significant available economic

The Brazilian Stock Market – Dimension, Structure, and Main Features 225

The capital market plays a key role in a country's economic development because it constitutes an efficient mechanism for allocating resources (Assaf Neto, 2008; Damodaran,

A long period of high inflation rate and general economic instability historically exerted serious negative effects on the Brazilian stock market until the mid 1990s. According to Lameira (2004), the Plano Real was a milestone for the Brazilian stock market. Indeed, the stock market, fostered by economic and political stability, initiated a vigorous pattern of

An intense inflow of capital from abroad is in the core of this growth process and due to this Bovespa is now the fifth bourse in the world in foreign investors' participation. The high internal interest rate and the privatization program started in 1997 have attracted considerable amounts of foreign capital except in 2002 (electoral year) (Lameira, 2004, p.104). Since then Brazil has come to be regarded as an important option for foreign investors. In July, August, and September 2011 foreign investors were responsible for 33%,

Foreign investments bring many benefits to the country that receives them but also cause

Some analysts emphasize that the Brazilian government should exercise tighter control over the flow of foreign capital, but others insist that the maintenance of good economic fundamentals, such as balance of public accounts and keeping inflation under control, along

2002).Unfortunately, Brazil was not able to take advantage of this until recent years.

34%, and 36% of the Bovespa's trade volume, respectively (BM&FBovespa, 2011).

Source: The Central Bank of Brazil (2011) Fig. 1. Selected Economic Series

out-00

mai-01

dez-01

jul-02

fev-03

set-03

abr-04

nov-04

jun-05

jan-06

ago-06

mar-07

out-07

mai-08

dez-08

jul-09

Exchange rate

Basic interest rate

Inflation rate - IGPM

Country risc (x1,000)

fev-10

set-10

abr-11



jan-99

ago-99

mar-00

0

1

2

3

4

5

6

**3. The Brazilian stock market, Bovespa, and CVM** 

growth since 2003, as demonstrated in Figure 2.

negative effects, as shown in Table 7.


#### Source: IBGE (2011)

Table 5. Brazil's GDP (R\$1,000) and GDP Per Capita (R\$) in 2008

data refer to the period beginning in 1999. Table 6 shows the Brazilian GDP growth rate and the inflation rate (consumer prices) over the last 12 years.


Source: IndexMundi (2011)

Table 6. Brazilian GDP Growth Rate and Inflation Rate

Figure 1 illustrates selected economic series for the mentioned time period. The electoral year of 2002 was clearly atypical. All the rest shows a very reasonable scenario of increasing stability.

The Brazilian auto industry became the fifth largest in the world in 2011, positioning itself after China, the United States, Japan, and Germany (O Globo, 2011). The strong growth in recent years in mining industry and construction is also noteworthy. Civil construction, in particular, has been encouraged by the federal government by means of easy credit and the Growth Acceleration Plan (PAC).

Brazilian exports have shown strong growth in recent years. According to the Ministry of Development, Industry, and Foreign Trade - MDIC (2011), in 2001 average daily exports totalled US \$ 233 million; while in 2011 already exceed US \$ 1 billion. However, a large space for growth is still perceivable in comparison with China (6.5 billion per day) and USA (5.3 billion per day).

A great variety and abundance of natural resources, including land for agriculture, water, and the tropical climate, as well as a domestic consumption presenting a clear pattern of growth, are frequently highlighted as an optimistic indication for business in the immediate future.

Source: The Central Bank of Brazil (2011)

Fig. 1. Selected Economic Series

224 Business Dynamics in the 21st Century

NORTHERN 154,704.2 5 10,216.4 NORTHEAST 397,502.6 13 7,487.5 SOUTHEAST 1,698,590.4 56 21,182.68

SOUTHERN 502,052.2 17 18,257.8 CENTRAL-WEST 279,015.1 9 20,372.1

data refer to the period beginning in 1999. Table 6 shows the Brazilian GDP growth rate and

**YEAR 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010**  GDP% 0.8 4.2 1.9 1.0 -0.2 5.1 2.3 3.7 5.4 5.1 -0.2 7.5 INFL% 4.9 7.1 6.8 8.4 14.8 6.6 6.9 4.2 3.6 5.7 5.0 5.0

Figure 1 illustrates selected economic series for the mentioned time period. The electoral year of 2002 was clearly atypical. All the rest shows a very reasonable scenario of increasing

The Brazilian auto industry became the fifth largest in the world in 2011, positioning itself after China, the United States, Japan, and Germany (O Globo, 2011). The strong growth in recent years in mining industry and construction is also noteworthy. Civil construction, in particular, has been encouraged by the federal government by means of easy credit and the

Brazilian exports have shown strong growth in recent years. According to the Ministry of Development, Industry, and Foreign Trade - MDIC (2011), in 2001 average daily exports totalled US \$ 233 million; while in 2011 already exceed US \$ 1 billion. However, a large space for growth is still perceivable in comparison with China (6.5 billion per day) and USA

A great variety and abundance of natural resources, including land for agriculture, water, and the tropical climate, as well as a domestic consumption presenting a clear pattern of growth, are frequently highlighted as an optimistic indication for business in the immediate

Table 5. Brazil's GDP (R\$1,000) and GDP Per Capita (R\$) in 2008

the inflation rate (consumer prices) over the last 12 years.

Table 6. Brazilian GDP Growth Rate and Inflation Rate

Source: IBGE (2011)

Source: IndexMundi (2011)

Growth Acceleration Plan (PAC).

(5.3 billion per day).

future.

stability.

Regions and States GDP % GDP per capita

**BRAZIL** 3,031,864.5 100 15,989.8

Minas Gerais 282,522.3 9 14,232.8 Espirito Santo 69,870.2 2 20,230.8 Rio de Janeiro 343,182.1 11 21,621.4 Sao Paulo 1,003,015.8 33 24,456.9

## **3. The Brazilian stock market, Bovespa, and CVM**

The capital market plays a key role in a country's economic development because it constitutes an efficient mechanism for allocating resources (Assaf Neto, 2008; Damodaran, 2002).Unfortunately, Brazil was not able to take advantage of this until recent years.

A long period of high inflation rate and general economic instability historically exerted serious negative effects on the Brazilian stock market until the mid 1990s. According to Lameira (2004), the Plano Real was a milestone for the Brazilian stock market. Indeed, the stock market, fostered by economic and political stability, initiated a vigorous pattern of growth since 2003, as demonstrated in Figure 2.

An intense inflow of capital from abroad is in the core of this growth process and due to this Bovespa is now the fifth bourse in the world in foreign investors' participation. The high internal interest rate and the privatization program started in 1997 have attracted considerable amounts of foreign capital except in 2002 (electoral year) (Lameira, 2004, p.104). Since then Brazil has come to be regarded as an important option for foreign investors. In July, August, and September 2011 foreign investors were responsible for 33%, 34%, and 36% of the Bovespa's trade volume, respectively (BM&FBovespa, 2011).

Foreign investments bring many benefits to the country that receives them but also cause negative effects, as shown in Table 7.

Some analysts emphasize that the Brazilian government should exercise tighter control over the flow of foreign capital, but others insist that the maintenance of good economic fundamentals, such as balance of public accounts and keeping inflation under control, along

The Brazilian Stock Market – Dimension, Structure, and Main Features 227

Share trading is the main activity of the Bovespa and follows specific rules. There are three trading channels in the Bovespa: *mega bolsa*, open-outcry sessions, and aftermarket trading sessions. Regardless of the channel used, only authorized brokers operate share trading.

Primary equities are issued through the Bovespa. Private and public sector corporations that meet the registration requirements of the Brazilian Securities Commission (CVM) become eligible to issue equity shares through the Bovespa. Such corporations can count on the market expertise and financial leverage of underwriters to launch stocks on the market. An underwriter may guarantee that the issuer will receive a certain price on the

In 1999 a home broker system was installed to allow investors to easily communicate with

The Brazilian stock market is ruled by the CVM, an agency of the Brazilian government that serves as the primary regulator of the securities trade. It attempts to ensure that all trades

CVM was established in 1976 with the objective of regulating and disciplining the operation of the Brazilian capital market. By offering institutional guarantees to investors and the desired operational flexibility, CVM fosters companies' capitalization and economic growth

Ensures the efficient, reliable, and equitable functioning of the securities market, and

Protects investors and securities holders by avoiding or preventing irregularities, frauds

Guarantees ample and fair disclosure of relevant information concerning securities

Figure 3 shows the participation in the volume of the *Fundos de Índices* (ETFs) in October 2010. These funds are known as offering efficiency, transparency and flexibility in a single investment. The major participants are institutional investors (45.3%), followed by financial

In order to grasp a better estimate of the Brazilian stock market dimension, Table 8 shows a

Number Of Listed Companies

Total Value Of Share Trading (USD Billions)

the brokerage firm by using the Internet, and its use has been growing ever since.

are fair, and that no price manipulation or insider trading occurs.

by means of a better allocation of resources.

traded and issuer companies (CVM, 2011).

institutions (26.6%), and foreign investors (16.2%).

**4. The Brazilian stock market dimension** 

Country Market Capitalization

Source: World Federation of Exchanges (2011)

comparison between the main burse in each country of the BRICs.

Brazil (Bovespa) 1 545 381 867 Russia (MICEX) 949 245 407 India (Bombay) 1 631 5 034 258 China (Shanghai) 2 716 894 4 486

(USD Billions)

Table 8. BRICs' Main Stock Exchanges by the End of 2010

In order to achieve its objectives, CVM:

and manipulative practices;

foments its expansion;

stocks sold.

Source: World Federation of Exchanges (2011)

Fig. 2. The Evolution of Bovespa's Share Trade and Market Capitalization


Source: Adapted from Pinheiro (2008, p. 39)

Table 7. Effects of Foreign Investments

with good growth prospects, are the best tools to maintain and expand the participation of foreign capital in the growth process of the country.

Founded in 1890, Bovespa assumed institutional characteristics in the 1960s and in 1967 became the Bolsa de Valores de Sao Paulo. In the 1990's all the regional stock exchanges in Brazil merged their trading activities under the leadership of Bovespa to create a unique nationwide stock market. In May 2008, after integration with the Commodities and Futures Exchange (BM&F), it was renamed BM&FBOVESPA.

Together, BM&F and Bovespa include trading of equities and fixed income securities, both stock markets and over the counter. However, the Bovespa basically involves share trading, options, debentures and a few other securities, while BM&F is devoted to commodities and futures, and also commodities and financial derivatives.

SHARE TRADING

CAPITALIZATION

MARKET

Source: World Federation of Exchanges (2011)

1991

1992

1993

1994

1995

1990

Improve the country's international image;

Government can finance its deficit for longer

foreign capital in the growth process of the country.

Exchange (BM&F), it was renamed BM&FBOVESPA.

futures, and also commodities and financial derivatives.

terms and lower interest rates;

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1,600,000

Greater opportunities for capital expenditures and costs reduction.

Source: Adapted from Pinheiro (2008, p. 39) Table 7. Effects of Foreign Investments

Fig. 2. The Evolution of Bovespa's Share Trade and Market Capitalization

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

**Positive effects Negative effects** 

with good growth prospects, are the best tools to maintain and expand the participation of

Founded in 1890, Bovespa assumed institutional characteristics in the 1960s and in 1967 became the Bolsa de Valores de Sao Paulo. In the 1990's all the regional stock exchanges in Brazil merged their trading activities under the leadership of Bovespa to create a unique nationwide stock market. In May 2008, after integration with the Commodities and Futures

Together, BM&F and Bovespa include trading of equities and fixed income securities, both stock markets and over the counter. However, the Bovespa basically involves share trading, options, debentures and a few other securities, while BM&F is devoted to commodities and

May cause imbalance in the country;

Possibility of fast reflux of external resources in the presence of negative indicators;

Struggle to prevent flights of capital in the presence of any international instability.

Share trading is the main activity of the Bovespa and follows specific rules. There are three trading channels in the Bovespa: *mega bolsa*, open-outcry sessions, and aftermarket trading sessions. Regardless of the channel used, only authorized brokers operate share trading.

Primary equities are issued through the Bovespa. Private and public sector corporations that meet the registration requirements of the Brazilian Securities Commission (CVM) become eligible to issue equity shares through the Bovespa. Such corporations can count on the market expertise and financial leverage of underwriters to launch stocks on the market. An underwriter may guarantee that the issuer will receive a certain price on the stocks sold.

In 1999 a home broker system was installed to allow investors to easily communicate with the brokerage firm by using the Internet, and its use has been growing ever since.

The Brazilian stock market is ruled by the CVM, an agency of the Brazilian government that serves as the primary regulator of the securities trade. It attempts to ensure that all trades are fair, and that no price manipulation or insider trading occurs.

CVM was established in 1976 with the objective of regulating and disciplining the operation of the Brazilian capital market. By offering institutional guarantees to investors and the desired operational flexibility, CVM fosters companies' capitalization and economic growth by means of a better allocation of resources.

In order to achieve its objectives, CVM:


Figure 3 shows the participation in the volume of the *Fundos de Índices* (ETFs) in October 2010. These funds are known as offering efficiency, transparency and flexibility in a single investment. The major participants are institutional investors (45.3%), followed by financial institutions (26.6%), and foreign investors (16.2%).

## **4. The Brazilian stock market dimension**

In order to grasp a better estimate of the Brazilian stock market dimension, Table 8 shows a comparison between the main burse in each country of the BRICs.


Source: World Federation of Exchanges (2011)

Table 8. BRICs' Main Stock Exchanges by the End of 2010

The Brazilian Stock Market – Dimension, Structure, and Main Features 229

**Return of Ibovespa**

The Bovespa's performance in recent years looks impressive both in respect of accumulated earnings and in relation to daily returns, but it is better to make this assessment by comparing its evolution with stock exchanges in other countries, especially the BRICs.

Fig. 6. Comparative Evolution of the BRICs' Main Stock Exchanges (2000 = 100)

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Figure 5 presents the monthly return of Ibovespa in the same time period.

Source: BM&FBovespa (2011)

February-00

September-00

April-01

November-01

June-02

January-03

August-03

March-04

October-04

May-05

December-05

July-06

February-07

September-07

April-08

November-08

June-09

January-10

August-10

March-11




0%

10%

20%

30%

Fig. 5. Ibovespa's Monthly Return Since Feb 2000

Bovespa Index Shanghai SE Bombay SE

Source: World Federation of Exchanges (2011)

Source: BM&FBOVESPA (2010b)

Fig. 3. Percentual Participation in the ETFs, Oct 2010

Bovespa is the largest stock exchange in Latin America, and is also one of the largest in the world.

Bovespa's most important index is Ibovespa, whose primary purpose is to indicate the general behaviour of the Brazilian stock market. Ibovespa represents more than 80% of either the number of operations or the value of share trade. Figure 4 shows the monthly evolution of Ibovespa since January 2000.

Source: Bovespa (2011)

Fig. 4. Ibovespa's Monthly Evolution Since Jan 2000

Figure 5 presents the monthly return of Ibovespa in the same time period.

228 Business Dynamics in the 21st Century

1%

45%

Private and public sector

Institutional investors

companies

Individuals

Foreign investors

Financial institutions

Bovespa is the largest stock exchange in Latin America, and is also one of the largest in the

Bovespa's most important index is Ibovespa, whose primary purpose is to indicate the general behaviour of the Brazilian stock market. Ibovespa represents more than 80% of either the number of operations or the value of share trade. Figure 4 shows the monthly

**Monthly Ibovespa**

Source: BM&FBOVESPA (2010b)

16%

27%

Source: Bovespa (2011)

0

January…

July-00

January…

July-01

10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000

Fig. 4. Ibovespa's Monthly Evolution Since Jan 2000

January…

July-02

January…

July-03

January…

July-04

January…

July-05

January…

July-06

January…

July-07

January…

July-08

January…

July-09

January…

July-10

January…

July-11

world.

Fig. 3. Percentual Participation in the ETFs, Oct 2010

11%

evolution of Ibovespa since January 2000.

Fig. 5. Ibovespa's Monthly Return Since Feb 2000

The Bovespa's performance in recent years looks impressive both in respect of accumulated earnings and in relation to daily returns, but it is better to make this assessment by comparing its evolution with stock exchanges in other countries, especially the BRICs.

Source: World Federation of Exchanges (2011)

Fig. 6. Comparative Evolution of the BRICs' Main Stock Exchanges (2000 = 100)

Source: BM&FBovespa (2011)

The Brazilian Stock Market – Dimension, Structure, and Main Features 231

Not only is the market concentrated, but so is the equity. Okimura (2003) affirms that there is a predominance of controlling shareholders in the Brazilian stock market, concentrating approximately 76% of vote-entitled shares, and Cavalhal da Silva (2004) states that, on average, the three largest shareholders control Brazilian companies. Table 10 indicates that among the 24 companies representing 1% or above of the Ibovespa, 15 are controlled by the major shareholder and another 3 by the two biggest shareholders. That is to say: 75% of

Companies a Shareholder 1 Shareholder 2 Total 1 ALL 12.18 7.58 19.76 2 AMBEV **65.30** 17.10 82.40 3 BANCO DO BRASIL **65.30** 11.10 76.40 4 BRADESCO 48.38 17.04 **65.42**  5 BRASIL TELECOM **79.63** 79.63 6 BRASIL TEL PART **79.63** 79.63 7 CEMIG **50.96** 32.96 83.92 8 CESP **94.08** 94.08 9 COPEL **58.63** 26.41 85.04 10 COSAN **62.33** 10.88 73.21 11 CSN 46.20 46.20 12 ELETROBRAS **52.00** 5.15 57.15 13 GERDAU **74.80** 7.10 81.90 14 GOL **100.00** 100.00 15 ITAU 38.66 51.00 **89.66**  16 NATURA 22.27 21.25 43.52 17 PERDIGAO 14.16 12.04 26.20 18 PETROBRAS **53.63** 5.18 58.81 19 TAM **80.40** 9.84 90.24 20 TELEMAR PART 19.33 16.89 36.22 21 TIM **77.14** 5.14 82.28 22 USIMINAS 23.74 10.13 33.87 23 VALE DO RIO DOCE **52.70** 6.70 59.40 24 VIVO 37.97 38.41 **76.38** 

those companies are controlled by one or two shareholders.

Source: BM&FBovespa (2011)

**disclosure** 

a Companies whose weight is 1% or above in the IBOVESPA

Table 10. Shareholders' Concentration in the Main Brazilian Companies

**6. Studies on the Brazilian stock market reaction to accounting information** 

The seminal study on the reaction of stock markets to statement disclosure by Ball and Brown (1968) indicates that stock prices show variation in the same direction of profit. The same study also concludes that most of the information contained in financial statements is anticipated by the market or is perceived before their publication. In fact, disclosure of

financial statements is just one among other information sources used by investors.

The index of the MICEX (Russia) is only available from 2005, so the comparison based on 2000 does not include it. Figure 6 shows that Bovespa's performance is lower than that of Bombay (India) and exceeds that of Shanghai (China).

Fig. 7. Comparative Evolution of the BRICs' Stock Exchanges (2005 = 100)

When considering the most recent period starting in 2005 (Figure 7), there is a quite different relationship between the indexes. In this case, Shanghai (China) stands out while the other three show very similar behaviour.

#### **5. The Brazilian stock market structure**

The Brazilian stock market is highly concentrated in a reduced number of companies in comparison to developed countries, as shown in Table 9.


Source: World Federation of Exchanges (2011)

Table 9. Stock Market Concentration - Value of Share Trade

In Bovespa just 8 sectors represent 85.0% of the share trading volume and the major 24 companies account for 72.3% of that volume. Petrobras (Oil and gas) accounts for 16.1%; Vale do Rio Doce (Mining), for 13.1%; Bradesco, Itau and Banco do Brasil (banks), for 8.5%; totalling 37.7% of the value of share trading (BM&FBovespa, 2011).

The index of the MICEX (Russia) is only available from 2005, so the comparison based on 2000 does not include it. Figure 6 shows that Bovespa's performance is lower than that of

> Bovespa Index MICEX Index Shanghai SE Bombay SE

Bombay (India) and exceeds that of Shanghai (China).

Source: World Federation of Exchanges (2011)

**5. The Brazilian stock market structure** 

NUMBER OF COMPANIES

Source: World Federation of Exchanges (2011)

comparison to developed countries, as shown in Table 9.

Table 9. Stock Market Concentration - Value of Share Trade

totalling 37.7% of the value of share trading (BM&FBovespa, 2011).

three show very similar behaviour.

STOCK EXCHANGE

Fig. 7. Comparative Evolution of the BRICs' Stock Exchanges (2005 = 100)

When considering the most recent period starting in 2005 (Figure 7), there is a quite different relationship between the indexes. In this case, Shanghai (China) stands out while the other

2005 2006 2007 2008 2009 2010

The Brazilian stock market is highly concentrated in a reduced number of companies in

In Bovespa just 8 sectors represent 85.0% of the share trading volume and the major 24 companies account for 72.3% of that volume. Petrobras (Oil and gas) accounts for 16.1%; Vale do Rio Doce (Mining), for 13.1%; Bradesco, Itau and Banco do Brasil (banks), for 8.5%;

MARKET CONCENTRATION

BOVESPA 19 64.2% 19 64.8% NYSE 104 57.0% 92 48.8% TOKYO 114 60.1% 115 60.1% LONDON 118 82.3% 109 86.4%

**2010 2009**

NUMBER OF COMPANIES

MARKET CONCENTRATION Not only is the market concentrated, but so is the equity. Okimura (2003) affirms that there is a predominance of controlling shareholders in the Brazilian stock market, concentrating approximately 76% of vote-entitled shares, and Cavalhal da Silva (2004) states that, on average, the three largest shareholders control Brazilian companies. Table 10 indicates that among the 24 companies representing 1% or above of the Ibovespa, 15 are controlled by the major shareholder and another 3 by the two biggest shareholders. That is to say: 75% of those companies are controlled by one or two shareholders.


Source: BM&FBovespa (2011)

a Companies whose weight is 1% or above in the IBOVESPA

Table 10. Shareholders' Concentration in the Main Brazilian Companies

#### **6. Studies on the Brazilian stock market reaction to accounting information disclosure**

The seminal study on the reaction of stock markets to statement disclosure by Ball and Brown (1968) indicates that stock prices show variation in the same direction of profit. The same study also concludes that most of the information contained in financial statements is anticipated by the market or is perceived before their publication. In fact, disclosure of financial statements is just one among other information sources used by investors.

The Brazilian Stock Market – Dimension, Structure, and Main Features 233

variables were defined as 16 accounting and financial indicators. The analyzed time period

The results indicated that the information embodied in the accounting exhibits impact differently common and preferred stock prices. For common stocks, current ratio, net working capital by sales, return on net equity, return on asset, sales by total assets, and sales by fixed assets, represented by their principal components, explained 29% of the return of stock price referred to 30 days after the accounting exhibits' publication on the trimester closing price.

In respect to preferred stocks, the model that better explains the relationship is based on the return of the stock price referred to 5 days after the exhibits' publication on the trimester closing price. Operational margin, net margin and return on net equity, in combination with total assets by sales , fixed assets by sales, and net equity by sales, represented by their

The stock market at Bovespa is divided into four segments: Traditional, Level 1, Level 2, and Novo Mercado (New Market). This is the ranking of the four segments according to specific

Companies in the Novo Mercado may only issue voting (common) shares and voluntarily undertake corporate rules and disclosure requirements which are much more stringent than those already established by Brazilian laws, known as "good practices of corporate governance". These rules are designed to increase shareholders' rights and enhance the quality of information provided by companies. Additionally, a Market Arbitration Panel is offered to resolve conflicts between investors and issuers (World Bank, Brazil Report September 2004). CVM, Bovespa, the Brazilian Institute of Corporate Governance (IBGC), and the Brazilian Bank for Economic and Social Development (BNDES) have acted together and created a positive climate in which companies pursue the accomplishment of the established standards of corporate governance by themselves in order to obtain a differentiation in the market and a higher value. The BNDES requires companies to promote the opening of capital and improve their corporate governance practices in exchange for the funding (Lameira, 2004, p.108-109). This important change in the Brazilian stock market, initiated in December 2000, is based on the idea that reduction in investor perceptions of risk presents a positive effect on share values and liquidity. As pointed out by the World Bank: "Bovespa believed that investors would perceive their risks to be lower if two things occurred: they were granted additional rights and guarantees as shareholders; and, if the asymmetry of access to information between controlling shareholders/company management and market participants was

According to Santana *et al*. (2008) "Brazil is at an advanced stage in the corporate governance debate, and demand for voting shares, transparency, tag along rights, and other

In comparison with other countries, experts recognise that the Brazilian experience in respect to corporate governance and stock market is successful. Petra Alexandru compared the *Novo Mercado* to Romania's Transparency Plus Tier and highlighted that in the latter the

principal components, explained 57% of the stock price variation.

**7. Corporate governance and the Brazilian stock market** 

narrowed (if not eliminated)." (World Bank, 2004).

corporate governance rights has increased significantly."

sets of regulatory and additional requirements of corporate governance.

was Jan/1st/ 1998 to Mar/31st/2008.

The Brazilian stock market remained undersized and lifeless until 1990s due to lack of monetary and political stability. Its strong growth in recent years presents as a consequence an increasing demand for research work and studies to provide guidance to agents, especially domestic and foreign investors. This difficulty is further increased because the few available studies do not always show convergence. Table 11 summarizes the recent literature on the influence of accounting information in the Brazilian stock market.


Source: Taffarel (2009)

Table 11. Recent Studies on the Reaction of the Brazilian Stock Market to Accounting Information Disclosure

These studies suggest that, in general, accounting information can be considered significant in explaining stock prices and returns in Brazil.

Taffarel (2009) sought to evaluate the importance of accounting information in the Brazilian stock market. The sample encompassed 34 companies chosen according to their participation in the theoretical Ibovespa. The dependent variable was defined as the daily stock closing price of the common or preferred stocks at different dates and the independent

The Brazilian stock market remained undersized and lifeless until 1990s due to lack of monetary and political stability. Its strong growth in recent years presents as a consequence an increasing demand for research work and studies to provide guidance to agents, especially domestic and foreign investors. This difficulty is further increased because the few available studies do not always show convergence. Table 11 summarizes the recent

literature on the influence of accounting information in the Brazilian stock market.

Lopes (2002) 1995-9 Accounting numbers are relevant to explain stock prices and

in the Brazilian stock market.

(2005) 1990-02 Evidence that changes in preferred share prices follow the direction of reported results.

(2006) 2001-04 Operating leverage presents a positive influence upon returns

Gomes (2006) 2000-04 Annual financial disclosures provide relevant information to the market and cause an increase in trade volume.

(2007) 2005 The date of publication of financial statements has consequence on stock prices and trade volume.

(2007) 1995-07 Existence of causality of accounting return on market return at a

These studies suggest that, in general, accounting information can be considered significant

Taffarel (2009) sought to evaluate the importance of accounting information in the Brazilian stock market. The sample encompassed 34 companies chosen according to their participation in the theoretical Ibovespa. The dependent variable was defined as the daily stock closing price of the common or preferred stocks at different dates and the independent

changes in costs are statistically significant.

Santos (2008) 2000-07 Changes in revenue do not influence return on shares, rather

Table 11. Recent Studies on the Reaction of the Brazilian Stock Market to Accounting

marginal level of 10%.

explanatory power is concentrated in companies' net equity.

Abnormal returns on disclosure of financial statements are not statistically significant. Abnormal returns on yearly results are significant, indicating that information is relevant in confirming

Disclosed results represent an important source of information for investors. Accounting reduces the informational asymmetry

The market believes that the higher the cost of debt, the greater the financial leverage and therefore the better the result of the

Changes in preferred share prices follow the direction of accounting results. In respect to common shares, only portfolios with negative returns follow the direction of reported results.

**AUTHOR(S) PERIOD FINDINGS** 

expectations.

on stocks.

company.

Sarlo Neto *et* 

Lima and

Sarlo Neto

Lopes *et al*.

Dantas *et al*.

Loriato and

Silva and

Scarpin *et al*.

Costa Jr. *et al*.

Source: Taffarel (2009)

Information Disclosure

in explaining stock prices and returns in Brazil.

*al*. (2003) 1990-02

Terra (2004) 1995-02

(2004) 1995-02

Favero (2007) 2005-06

variables were defined as 16 accounting and financial indicators. The analyzed time period was Jan/1st/ 1998 to Mar/31st/2008.

The results indicated that the information embodied in the accounting exhibits impact differently common and preferred stock prices. For common stocks, current ratio, net working capital by sales, return on net equity, return on asset, sales by total assets, and sales by fixed assets, represented by their principal components, explained 29% of the return of stock price referred to 30 days after the accounting exhibits' publication on the trimester closing price.

In respect to preferred stocks, the model that better explains the relationship is based on the return of the stock price referred to 5 days after the exhibits' publication on the trimester closing price. Operational margin, net margin and return on net equity, in combination with total assets by sales , fixed assets by sales, and net equity by sales, represented by their principal components, explained 57% of the stock price variation.

## **7. Corporate governance and the Brazilian stock market**

The stock market at Bovespa is divided into four segments: Traditional, Level 1, Level 2, and Novo Mercado (New Market). This is the ranking of the four segments according to specific sets of regulatory and additional requirements of corporate governance.

Companies in the Novo Mercado may only issue voting (common) shares and voluntarily undertake corporate rules and disclosure requirements which are much more stringent than those already established by Brazilian laws, known as "good practices of corporate governance". These rules are designed to increase shareholders' rights and enhance the quality of information provided by companies. Additionally, a Market Arbitration Panel is offered to resolve conflicts between investors and issuers (World Bank, Brazil Report September 2004).

CVM, Bovespa, the Brazilian Institute of Corporate Governance (IBGC), and the Brazilian Bank for Economic and Social Development (BNDES) have acted together and created a positive climate in which companies pursue the accomplishment of the established standards of corporate governance by themselves in order to obtain a differentiation in the market and a higher value. The BNDES requires companies to promote the opening of capital and improve their corporate governance practices in exchange for the funding (Lameira, 2004, p.108-109).

This important change in the Brazilian stock market, initiated in December 2000, is based on the idea that reduction in investor perceptions of risk presents a positive effect on share values and liquidity. As pointed out by the World Bank: "Bovespa believed that investors would perceive their risks to be lower if two things occurred: they were granted additional rights and guarantees as shareholders; and, if the asymmetry of access to information between controlling shareholders/company management and market participants was narrowed (if not eliminated)." (World Bank, 2004).

According to Santana *et al*. (2008) "Brazil is at an advanced stage in the corporate governance debate, and demand for voting shares, transparency, tag along rights, and other corporate governance rights has increased significantly."

In comparison with other countries, experts recognise that the Brazilian experience in respect to corporate governance and stock market is successful. Petra Alexandru compared the *Novo Mercado* to Romania's Transparency Plus Tier and highlighted that in the latter the

The Brazilian Stock Market – Dimension, Structure, and Main Features 235

Ball, R.; Brown, P. (1968) 'An Empirical Evaluation of Accounting Income Numbers', *Journal* 

BM&FBovespa. (2010a). Bolsa de Valores de Sao Paulo. Estatística sobre volume de

BM&FBovespa. (2010b). Bolsa de Valores de Sao Paulo. ETFs- Boletim-Mensal-2010.

BM&FBovespa. (2010c). Bolsa de Valores de Sao Paulo. Informações sobre níveis de

BM&FBovespa. (2010d). Bolsa de Valores de Sao Paulo. Informações sobre a carteira ISE.

Cavalhal da Silva, A. L. (2004) 'Corporate governance, value, leverage and dividend policies

Central Bank of Brazil (2011). Economics and finance. Central Bank of Brazil. Available at

Costa Jr. N. C., Meurer, R. and Cupertino, C. M. (2007) 'Is there a relationship between

CVM. (2010a). Dados sobre capitalização média do Brasil. Gerência de Estudos Econômicos.

CVM. (2010b) Dados sobre governança corporativa. Available at: www.cvm.org.br/.

Dantas, J. A., Medeiros, O. R. and Lustosa, P. R. (2006) 'Market reaction to operational

FARIA, A.; MAURO, P.; ZAKLAN, A. (2010) The External Financing of Emerging Markets –

Fundação do Desenvolvimento Administrativo do Estado de São Paulo – Grupo de

IBGE. (2010) Instituto Brasileiro de Geografia e Estatística. Sinopse do Censo Demográfico.

IBGE. (2011). Brazilian Institute of Geography and Statistics . Term indicators .Available at:

http://www.ifc.org/ifcext/cgf.nsf/AttachmentsByTitle/Focus+5/\$FILE/Novo+M

of Brazilian corporations' (translated), *Revista de Administração* - USP. Sao Paulo,

accounting returns and market returns in the Brazilian stock market'(translated),

leverage: an empirical study in Brazil' (translated), *Revista de Contabilidade e* 

Evidence from Two Waves of Financial Globalization. Review of Finance. p. 1-37,

Conjuntura. (2010). O Mercado de Capitais Brasileiro no Período 2003-2007: evolução

*of Accounting Research*, Vol. 6, No. 2 pp. 159-178.

<http://www.BM&FBOVESPA.com.br>. Accessed Dec/ 3/2010.

<http://www.BM&FBOVESPA.com.br> . Accessed Dec/ 3/2010.

<http://www.BM&FBOVESPA.com.br> . Accessed Dec /3/ 2010.

http://www.bmfbovespa.com.br/>. Accessed Dec/3/2010.

governança corporativa. Available at:

BM&FBovespa. Sao Paulo Stock Exchange (2011). Available at: http://www.bovespa.com.br. Accessed: Set/16 /2011.

<http://www.bcb.gov.br>. Accessed Set/ 28/2011.

*Revista Brasileira de Finanças*. Vol. 5, No. 2, pp. 233–245.

Available at: www.cvm.org.br/ . Accessed Set/16/2011.

Damodaran, A. (2002) Applied Corporate Finance, Porto Alegre: Bookman.

http://www.ibge.gov.br/home/. Accessed May/13 /2011. IPEADATA. (2011). Dados econômicos e sociais do Brasil. Available at:

ercado+text+screen+4-21-08.pdf . Accessed Sep/30/ 2011

*Finanças* – USP, Sao Paulo, No. 41, pp. 72 – 86.

negociação. Available at:

Vol. 39, No. 4. pp. 348-361.

Accessed Set/16/2011.

e tendências. Available at:

2010. Rio de Janeiro: 2011.

www.fundap.sp.gov.br/. Accessed Set/ 5/ 2010.

 www.ipeadata.gov.br. Accessed Sep/30/ 2011. IFC. (2008) International Finance Corporate. Available at

July 2010.

Available at:

Available at:

Romanian Corporate Governance Codes and Principles and the T+Tier were imposed upon listed companies as mandatory requirements. As a result, only one company had applied to be listed on the T+ Tier until 2006. "The positive attitude of the local issuers towards such standards was overestimated."(IFC, 2008).

Melsa Ararat and B. Burcin Yurtoglu compared the Istanbul Stock Exchange's initiative to promote higher corporate governance among its listed companies to the *Novo Mercado's* experience. They pointed out that Turkey's plan failed and that the small diversification in comparison to Brazil is likely to be a main explanatory factor (IFC, 2008).

## **8. Final remarks**

Brazil presents good economic and social indicators, mainly originating from mid-1990. Once the *Plano Real* was established in 1994, the economy went through a period of accommodation that would have ended in 1998 were it not for the instability that plagued the world economy and the proximity of the 2002 elections. Thus, the beneficial effects of stabilization were only made present in a clear and lasting way from 2003. This is very noticeable in the behaviour of the Bovespa.

Data on the Brazilian economy, especially since the *Plano Real*, has led to a growing number of supporters of the government's policy of maintaining a political and economic environment favourable to increasing participation of foreign capital in the country's development, including absence of control.

Bovespa concentrates practically the whole stock market in Brazil, and receives a significant flow of capital resources from abroad, but it is not well known yet. Indeed, there are few studies on the Brazilian stock market, and the fast growth process imposes changes that make it still more difficult to properly understand its functioning.

Bovespa is comparable in size to the main stock exchanges in the BRICs, the Brazilian stock market is markedly concentrated, and equity control is concentrated in hands of a few shareholders.

Studies on the influence of accounting indicators on prices and stock returns in the Brazilian market are still scarce and inconclusive. A recent study (Taffarel, 2009), however, shows that the preferred and common shares react differently to the publication of financial statements in the short term.

The Brazilian experience on the classification of stocks as to the standards of management and information made available to the market by issuer companies can be considered a success, especially when compared to other developing countries. In Brazil, companies are encouraged to adhere to different levels of governance, but they do so freely.

The introductory remarks in this chapter may serve as a starting point for the persons concerned with deepening their knowledge of the Brazilian stock market, but they are obviously insufficient for making an investment decision. The general characteristics presented here constitute only an overview of the current situation and prospects.

#### **9. References**

Assaf Neto, A.(2008). Mercado Financeiro. 8. Ed. Sao Paulo: Atlas.

Romanian Corporate Governance Codes and Principles and the T+Tier were imposed upon listed companies as mandatory requirements. As a result, only one company had applied to be listed on the T+ Tier until 2006. "The positive attitude of the local issuers towards such

Melsa Ararat and B. Burcin Yurtoglu compared the Istanbul Stock Exchange's initiative to promote higher corporate governance among its listed companies to the *Novo Mercado's* experience. They pointed out that Turkey's plan failed and that the small diversification in

Brazil presents good economic and social indicators, mainly originating from mid-1990. Once the *Plano Real* was established in 1994, the economy went through a period of accommodation that would have ended in 1998 were it not for the instability that plagued the world economy and the proximity of the 2002 elections. Thus, the beneficial effects of stabilization were only made present in a clear and lasting way from 2003. This is very

Data on the Brazilian economy, especially since the *Plano Real*, has led to a growing number of supporters of the government's policy of maintaining a political and economic environment favourable to increasing participation of foreign capital in the country's

Bovespa concentrates practically the whole stock market in Brazil, and receives a significant flow of capital resources from abroad, but it is not well known yet. Indeed, there are few studies on the Brazilian stock market, and the fast growth process imposes changes that

Bovespa is comparable in size to the main stock exchanges in the BRICs, the Brazilian stock market is markedly concentrated, and equity control is concentrated in hands of a few

Studies on the influence of accounting indicators on prices and stock returns in the Brazilian market are still scarce and inconclusive. A recent study (Taffarel, 2009), however, shows that the preferred and common shares react differently to the publication of financial statements

The Brazilian experience on the classification of stocks as to the standards of management and information made available to the market by issuer companies can be considered a success, especially when compared to other developing countries. In Brazil, companies are

The introductory remarks in this chapter may serve as a starting point for the persons concerned with deepening their knowledge of the Brazilian stock market, but they are obviously insufficient for making an investment decision. The general characteristics

encouraged to adhere to different levels of governance, but they do so freely.

presented here constitute only an overview of the current situation and prospects.

Assaf Neto, A.(2008). Mercado Financeiro. 8. Ed. Sao Paulo: Atlas.

comparison to Brazil is likely to be a main explanatory factor (IFC, 2008).

make it still more difficult to properly understand its functioning.

standards was overestimated."(IFC, 2008).

noticeable in the behaviour of the Bovespa.

development, including absence of control.

**8. Final remarks** 

shareholders.

in the short term.

**9. References** 


<http://www.BM&FBOVESPA.com.br>. Accessed Dec/ 3/2010.

BM&FBovespa. (2010b). Bolsa de Valores de Sao Paulo. ETFs- Boletim-Mensal-2010. Available at:

http://www.bmfbovespa.com.br/>. Accessed Dec/3/2010.

BM&FBovespa. (2010c). Bolsa de Valores de Sao Paulo. Informações sobre níveis de governança corporativa. Available at:

<http://www.BM&FBOVESPA.com.br> . Accessed Dec/ 3/2010.

BM&FBovespa. (2010d). Bolsa de Valores de Sao Paulo. Informações sobre a carteira ISE. Available at:

<http://www.BM&FBOVESPA.com.br> . Accessed Dec /3/ 2010.


www.fundap.sp.gov.br/. Accessed Set/ 5/ 2010.


 http://www.ifc.org/ifcext/cgf.nsf/AttachmentsByTitle/Focus+5/\$FILE/Novo+M ercado+text+screen+4-21-08.pdf . Accessed Sep/30/ 2011

**12** 

Chee-Heong Quah

*University of Malaya* 

*Malaysia* 

*Faculty of Business and Accountancy,* 

Bayoumi and Eichengreen (1997, p.762)

**The Case for Monetary Union in** 

**East Asia – From Theory to Empirics** 

In the interwar years, the difficulties of reinstating the gold standard and the disruptive shock of the Great Depression had prompted a wide-ranging debate on the international monetary system in the West. Today, the developments in the West, in particular the birth of euro and the Asian financial crisis were among the drivers which had spurred the proliferation of the intellectual work on monetary arrangement in the context of East Asia.

The theory of optimum currency areas (OCAs) has advanced only minimally since the seminal contributions of Mundell (1961), McKinnon (1963), and Kenen (1963). It

Nevertheless, as the above statement vividly points out, it has remained difficult to operationalize the intellectual work to practical grounds given the complexities found in the real world. In spite of this, numerous empirical studies have attempted to demystify the theory in an effort to identify groups of economies which could possibly come together

Against this backdrop, the present paper seeks to present the reasons why the idea of Asian monetary union has gained increasing popularity despite of the obstacle highlighted. Along this line, the paper also provides the arguments for two alternative monetary anchors. Finally, the paper reviews a number of empirical works in the field in order to identify countries which have been commonly indicated to be prospective for integration and to

The remaining of the paper is structured as follows. Section 2 revisits the essence of the classical work which has propagated the intellectual framework. Section 3 explains why flexible exchange rates are most probably not suitable for emerging East Asia. Section 4 details the case for fixed exchange rate and monetary union for the region. Sections 5 and 6 present the case for US dollar and the case for currency basket as the monetary anchor respectively. Section 7 provides the review of 20 empirical studies and section 8 discusses

remains difficult to move from theory to empirical work and policy analysis.

**1. Introduction** 

under one common monetary umbrella.

relevant interpretations and concludes.

comment on some general trends found in the empirical papers.

Index Mundi. (2011) Demographics: population. Available at:

<http://www.indexmundi.com> . Accessed Set/20/2011.


< http://data.worldbank.org>. Accessed Set/27/2011.

World Federation of Exchanges. (2011). Statistics. World Federation of Exchanges. Available at: http://www.world-exchanges.org/statistics. Accessed Set/26 /2011.
