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on International Finance |
| By: | Chris Becker (Reserve Bank of Australia); Clare Noone (Reserve Bank of Australia) |
| Abstract: | Conventional wisdom is that some capital flows are inherently more volatile than others. However, our investigation of the statistical properties of these flows shows that no regular relationships exist to suggest that the particular composition of capital flows can help to explain the overall stability of the external accounts. Instead, capital seems to come and go in different forms with few reliable patterns. We show that while industrialised economies have experienced a trend rise in the volatility of individual components in the capital account, this variability is largely offsetting. Such offsetting relationships appear less prevalent in emerging economies. |
| Keywords: | capital flows; volatility; financial globalisation |
| JEL: | F21 F32 F36 O16 O24 |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:rba:rbardp:rdp2009-09&r=ifn |
| By: | Vistesen, Claus |
| Abstract: | This thesis is built upon two core arguments. The first is the notion that the demographic transition should be narrated through the perspective of ageing rather than population growth and the second is that ageing on a macroeconomic level represents a strong driver of international capital flows. These two arguments are used to discuss the standard prediction in a life cycle framework that ageing leads to dissaving in the aggregate and thus how old economies should tend towards running current account deficits. Using Japan and Germany as the subjects of analysis, this thesis develops the idea that rapidly ageing societies are not, in the main, characterized by dissaving but rather by the fight against it. Finally, a small empirical exercise acts as a perspectivation on the results to suggest why ageing might lead to a reliance on exports and foreign asset income to achieve growth and what this means in a global context. |
| Keywords: | demographics; international capital flows; life cycle economics; |
| JEL: | F02 J1 D91 E21 |
| Date: | 2010–02–16 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:21929&r=ifn |
| By: | Hacker, Scott (Jonkoping International Business School); Kim, Hyunjoo (Jonkoping International Business School); Månsson, Kristofer (Jonkoping International Business School) |
| Abstract: | This paper uses wavelet analysis to investigate the relationship between the spot exchange rate and the interest rate differential for seven pairs of countries, with a small country, Sweden, included in each of the cases. The key empirical results show that there tends to be a negative relationship between the spot exchange rate (domestic-currency price of foreign currency) and the nominal interest rate differential (approximately the domestic interest rate minus the foreign interest rate) at the shortest time scales, while a positive relationship is shown at the longest time scales. This indicates that among models of exchange rate determination using the asset approach, the sticky-price models are supported in the short-run while in the long-run the flexible-price models appear to better explain the sign of the relationship. |
| Keywords: | exchange rates; interest rate differential; uncovered interest parity; monetary approach; small-economy; wavelet analysis |
| JEL: | E44 F31 F42 |
| Date: | 2010–02–11 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:cesisp:0217&r=ifn |
| By: | M. FRÖMMEL; N. KISS M; K. PINTÉR; |
| Abstract: | We investigate the relation between the intradaily HUF/EUR exchange rate on the one hand and news announcements and order flow on the other hand. We extend the existing literature on foreign exchange market microstructure by considering a small open transition economy. We find that the intradaily exchange rate depends on both, news announcements and order flow. We conclude that news on the HUF/EUR market are transmitted directly via immediate reactions to news announcements as well as indirectly via order flow. We decompose the news’ total effect on exchange rate and find that order flow accounts for approximately three quarters, compared to one quarter for direct news impact. Although the HUF is pegged to the EUR, the exchange rate shows similar characteristics as reported in the literature for major currencies. It does, however, differ in quantitative terms: the importance of indirect news transmission is remarkably higher on the HUF/EUR market. Furthermore, we extend the commonly used set of news by communication of central bankers and significantly improve the explanatory power of the estimates. Thus, central bank communication can be regarded as an important determinant for the HUF/EUR rate. |
| Keywords: | microstructure, order flow, exchange rate, macroeconomic news, central bank communication, Hungary |
| JEL: | F31 G14 G15 |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:rug:rugwps:09/626&r=ifn |
| By: | Don Bredin (University College Dublin); Stuart Hyde (University of Manchester) |
| Abstract: | This paper investigates the degree of both foreign exchange rate and interest rate exposure of industry level portfolios in the G7. Our paper draws on the efficient market hypothesis and examines the extent of unexpected foreign exchange (and interest rate) exposure rather than the standard approach of focusing purely on the change in foreign exchange (and interest rate) exposure. The results from our baseline regressions are consistent with those previously found in the literature that there is little evidence of exchange rate exposure in most markets — this is the exchange rate exposure puzzle. The second critical element of our analysis is that we investigate the sources of the exposure and examine the existence of indirect levels of both foreign exchange and interest rate exposure. The findings of exposure to foreign exchange rates and interest rates are extensive for industry sectors in the G7 economies when we take account of the possible channels of influence. Results indicate key differences between countries in terms of the relative importance of these cash flow and discount rate channels. |
| Keywords: | Foreign exchange, exposure, interest rates, stock returns, international finance |
| JEL: | F31 G15 |
| Date: | 2010–01–01 |
| URL: | http://d.repec.org/n?u=RePEc:ucd:wpaper:201001&r=ifn |
| By: | Hacker, Scott (Jonkoping International Business School); Kim, Hyunjoo (Jonkoping International Business School); Månsson, Kristofer (Jonkoping International Business School) |
| Abstract: | Monthly and quarterly data for the spot exchange rate of the Swedish Krona against major currencies have been used in this paper to investigate the causality in a Granger sense at different time scales between the spot exchange rate and the nominal interest rate differential by using wavelet analysis. Impulse response functions are also utilized to examine the signs of how one of these variables affects the other over time. One key empirical finding from the causality tests is that there is only substantial evidence of a causal relationship in the long run between the two variables. When using monthly data, this is true in both directions. When considering impulse responses on how the interest rate differential affects the exchange rate, there appears to be some evidence of more negative relationships at the shorter time scales and more positive relationships at the longer time scales. |
| Keywords: | exchange rate; interest rate differential; Granger causality; wavelet analysis; uncovered interest rate parity |
| JEL: | C32 E44 F31 F42 |
| Date: | 2010–02–11 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:cesisp:0215&r=ifn |
| By: | Mancini, Loriano (Swiss Finance Institute at EPFL); Ranaldo, Angelo (Swiss National Bank); Wrampelmeyer, Jan (University of Zurich) |
| Abstract: | This paper develops a liquidity measure tailored to the foreign exchange (FX) market, quantifies the amount of commonality in liquidity across exchange rates, and determines the extent of liquidity risk premiums embedded in FX returns. The new liquidity measure utilizes ultra high frequency data and captures cross-sectional and temporal variation in FX liquidity during the financial crisis of 2007–2008. Empirical results show that liquidity co-moves across currency pairs and that systematic FX liquidity decreases dramatically during the crisis. Extending an asset pricing model for FX returns by the novel liquidity risk factor suggests that liquidity risk is heavily priced. |
| Keywords: | Foreign Exchange Market; Measuring Liquidity; Commonality in Liquidity; Liquidity Risk Premium; Subprime Crisis |
| JEL: | F31 G12 G15 |
| Date: | 2009–11–20 |
| URL: | http://d.repec.org/n?u=RePEc:ris:snbwpa:2010_003&r=ifn |
| By: | Miguel A. León-Ledesma; Reginaldo P. Nogueira Júnior |
| Abstract: | Recent literature has argued that exchange rate pass-through (ERPT) into domestic inflation has been declining in many countries following a dramatic change in inflation environment during the 1990s. Available empirical results face two central challenges: (i) the evidence on declining ERPT is mostlybased on sample-splitting approaches and hence subject to a degree of arbitrariness; and (ii) the link between a lower ERPT and inflation environment is usually based on simple correlation analysis and hence silent about temporal causality. We address these issues by making use of a state-space model that allows ERPT to be time-varying and dependent on the inflation environment. We estimate the model for 12 developed and emerging economies and test whether inflation contains significant information about the future evolution of the ERPT. The results reinforce the view of a smooth decline in the impact of exchange rates on domestic inflation, but do not support the hypothesis that lower inflation precedes this declining ERPT. |
| Keywords: | Exchange Rate Pass-Through, Inflation, State-space Models, Causality Tests. |
| JEL: | E42 E52 E58 F31 F41 |
| Date: | 2010–04 |
| URL: | http://d.repec.org/n?u=RePEc:ukc:ukcedp:1002&r=ifn |
| By: | Thorbecke, Willem (Asian Development Bank Institute) |
| Abstract: | Many argue that the yuan needs to appreciate to rebalance the People's Republic of China's trade. However, empirical evidence on the effects of a CNY appreciation on the People's Republic of China's exports has been mixed for the largest category of exports, processed exports. Since much of the value-added of these goods comes from parts and components produced in Japan, the Republic of Korea, and other East Asian supply chain countries, it is important to control for exchange rate changes in these countries. Employing dynamic ordinary least squares, or DOLS, techniques and quarterly data, this paper finds that exchange rate appreciations across supply chain countries would cause a much larger drop in processed exports than a unilateral appreciation of the yuan. |
| Keywords: | exchange rate changes prc; prc processed exports; global imbalances; exchange rate elasticities; china |
| JEL: | F32 F41 |
| Date: | 2010–03–03 |
| URL: | http://d.repec.org/n?u=RePEc:ris:adbiwp:0202&r=ifn |
| By: | M Farid; |
| Abstract: | Trade data on East Asian EMEs shows the predominant use of Dollar Currency Pricing (DCP). Using a DSGE model with six-stage vertical production chain, staggered prices, and cross-border trade in intermediate inputs, we aim to provide an alternative explanation for ‘fear of floating’ by EMEs. We examine interactions between firms’ pricing rules and the transmission of external shocks under different exchange rate regimes. We find that weak input substitution and DCP of exports eliminate expenditure-switching and the allocative role of exchange rate adjustment, resulting in ‘exchange rate disconnect’, and hence ‘fear of floating’ by EMEs. |
| Keywords: | Vertical production chain; Staggered price contracts; Input Substitution; External Currency Pricing; Monetary Policy |
| JEL: | E31 E52 F41 |
| Date: | 2010–03 |
| URL: | http://d.repec.org/n?u=RePEc:yor:yorken:10/05&r=ifn |
| By: | Cho-Hoi Hui (Research Department, Hong Kong Monetary Authority); Hans Genberg (Research Department, Hong Kong Monetary Authority); Tsz-Kin Chung (Research Department, Hong Kong Monetary Authority) |
| Abstract: | Significant deviations from covered interest parity were observed during the financial crisis of 2007-2009. This paper finds that before the failure of Lehman Brothers the market-wide funding liquidity risk was the main determinant of these deviations in terms of the premiums on swap-implied US dollar interest rates for the euro, British pound, Hong Kong dollar, Japanese yen, Singapore dollar and Swiss Franc. This suggests that the deviations can be explained by the existence and nature of liquidity constraints. After the Lehman default, both counterparty risk and funding liquidity risk in the European economies were the significant determinants of the positive deviations, while the tightened liquidity condition in the US dollar was the main driving factor of the negative deviations in the Hong Kong, Japan and Singapore markets. Federal Reserve Swap lines with other central banks eased the liquidity pressure and reduced the positive deviations in the European economies. |
| Keywords: | Sub-prime crisis, funding liquidity, covered interest parity, FX swaps |
| JEL: | F31 F32 F33 |
| Date: | 2009–07 |
| URL: | http://d.repec.org/n?u=RePEc:hkg:wpaper:0913&r=ifn |
| By: | Roberto Frenkel (Centro de Estudios de Estado y Sociedad (CEDES)); Martin Rapetti (University of Massachusetts Amherst) |
| Abstract: | The paper analyzes exchange rate regimes implemented by the major Latin American countries since the Second World War, with special attention on the period of the second globalization process beginning in the 1970s. The analysis follows a historical narrative aiming to provide an understanding of the domestic and external circumstances in which various regimes were adopted. A simple conceptual framework is developed in order to emphasize how the exchange rate regime may affect key nominal and real variables in a small open economy. After an overview of the main trends followed by the major countries in the region over the last 60 years, the paper focuses on regimes that were implemented 1) with stabilization purposes (nominal anchors) and 2) with the aim of targeting the level of the real exchange rate. These two sections analyze in greater detail some experiences illustrating the pros and cons of both strategies. The paper closes with an assessment about exchange rate experiences in Latin America. JEL Categories: F41, N16, F31 |
| Keywords: | Latin America, exchange rate regimes, real exchange rate, inflation targeting. |
| Date: | 2010–02 |
| URL: | http://d.repec.org/n?u=RePEc:ums:papers:2010-01&r=ifn |
| By: | Stephen Hall |
| Abstract: | A recent contribution to the literature argues that the present international monetary system in many ways operates like the Bretton-Woods system. Asia is the new periphery of the system and pursues an export-led development strategy. The members of the new periphery peg their currencies to the U.S. dollar at undervalued exchange rates and accumulate foreign reserves. In contrast, the old periphery - - consisting of Western Europe, Canada and parts of Latin America - - interacts with the centre with flexible exchange rates; its aggregate current account has been roughly in balance. As under the older system, the United States remains the centre country, pursuing a monetary-policy strategy that overlooks the exchange rate. An implication of this argument is the following asymmetry hypothesis: under both regimes the United States does not take external factors into account in conducting monetary policy while the periphery does take external factors into account. We provide results of a test of the asymmetry hypothesis. Then, we present a new method for decomposition of the business cycle using a time-varying-coefficient technique that allows us to test the relationship between the cycle and macroeconomic policies. We apply this technique to five countries for three sub-periods over the 1959 to 2007 period. |
| Keywords: | Revived Bretton-Woods System; Asymmetry Hypothesis; Time-Series Decomposition; Time-Varying-Coefficient Estimation |
| JEL: | C22 E32 F33 |
| Date: | 2009–09 |
| URL: | http://d.repec.org/n?u=RePEc:lec:leecon:09/15&r=ifn |
| By: | Aizenman, Joshua (University of California Sta. Cruz); D. Chinn, Menzie (University of Wisconsin); Ito, Hiro (Portland State University) |
| Abstract: | Using the “trilemma indexes” developed by Aizenman et al. (2008) that measure the extent of achievement in each of the three policy goals in the trilemma—monetary independence, exchange rate stability, and financial openness—this paper examines how policy configurations affect macroeconomic performances with focus on the Asian economies. We find that the three policy choices do not matter for per capita economic growth. However, they do matter for output volatility and the medium-term level of inflation. Greater monetary independence is associated with lower output volatility while greater exchange rate stability implies greater output volatility, which can be mitigated if a country holds international reserves (IR) at a higher level than a threshold (about 20% of gross domestic product). Greater monetary autonomy is associated with a higher level of inflation while greater exchange rate stability and greater financial openness could lower the inflation level. We find that trilemma policy configurations and external finances affect output volatility mainly through the investment channel. While a higher degree of exchange rate stability could stabilize the real exchange rate movement, it could also make investment volatile, though the volatility-enhancing effect of exchange rate stability on investment can be cancelled by holding higher levels of IR. Greater financial openness helps reduce real exchange rate volatility. These results indicate that policy makers in a more open economy would prefer pursuing greater exchange rate stability and greater financial openness while holding a massive amount of IR. Asian emerging market economies are found to be equipped with macroeconomic policy configurations that help the economies to dampen the volatilities in both investment and real exchange rate. These economies’ sizeable amount of international reserves holding appears to help enhance the stabilizing effect of the trilemma policy choices, which explains the recent phenomenal buildup of international reserves in the region. |
| Keywords: | trilemma policy; Asian emerging market economies; financial globalization; output volatility |
| Date: | 2009–11 |
| URL: | http://d.repec.org/n?u=RePEc:ris:adbewp:0180&r=ifn |
| By: | Park, Donghyun (Asian Development Bank); Estrada, Gemma (Asian Development Bank) |
| Abstract: | Developing Asian countries have accumulated foreign exchange reserves on an unprecedented scale in recent years. There is a growing consensus that Asia’s reserves now substantially exceed the levels required for precautionary purposes or for self-protection against currency crisis. The central objective of our paper is to informally and formally test whether reserves in developing Asia have in fact reached excessive levels. Informal tests of reserve adequacy based on widely used rules of thumb such as the Greenspan-Guidotti rule unambiguously indicate the presence of sizable excess reserves. To test for excess reserves more formally, we use panel-data econometric analysis based on Edison (2003). Our estimation results indicate the presence of large and growing excess reserves since 2002. The results of both informal and formal tests thus confirm the popular belief that developing Asia now has excessive foreign exchange reserves. Therefore, the short-run policy challenge for Asian governments is to manage the region’s burgeoning excess reserves more actively and use them more productively. One promising area of future research, brought to the fore by the global financial crisis, is to develop more nuanced measures of reserve adequacy that take into account the possibility of severe negative shocks. |
| Keywords: | Foreign exchange reserve; Asia |
| JEL: | F31 |
| Date: | 2009–08 |
| URL: | http://d.repec.org/n?u=RePEc:ris:adbewp:0170&r=ifn |
| By: | D. Alba, Joseph (Nanyang Technological University); Park, Donghyun (Asian Development Bank); Wang, Peiming (Auckland University of Technology) |
| Abstract: | The paper examines the impact of exchange rates on foreign direct investment (FDI) inflows into the United States in the context of a model that allows for the interdependence of FDI over time. Interdependence is modeled as a two-state Markov process where the two states can be interpreted as either a favorable or an unfavorable environment for FDI in an industry. Unbalanced industry-level panel data from the US wholesale trade sector are used in the analysis and yield two main results. First, the paper finds evidence that FDI is interdependent over time. Second, under a favorable FDI environment, the exchange rate has a positive and significant effect on the average rate of FDI inflows. |
| Keywords: | Basic research; technology creation; technology adoption; economic growth |
| JEL: | O31 O47 |
| Date: | 2009–06 |
| URL: | http://d.repec.org/n?u=RePEc:ris:adbewp:0164&r=ifn |
| By: | Paul Alagidede (Department of Economics, University of Stirling); Theodore Panagiotidis (Department of Economics, University of Macedonia); Xu Zhang (Guosen Research Institute) |
| Abstract: | This paper investigates the nature of the causal linkage between stock markets and foreign exchange markets in Australia, Canada, Japan, Switzerland, and UK from 1992:1 to 2005:12. Recently developed cointegration tests are employed and no evidence of a long-run relationship between the variables is found. Three variations of the Granger causality test are carried out and causality from exchange rates to stock prices is found for Canada, Switzerland, and United Kingdom; weak causality in the other direction is found only for Switzerland. The Hiemstra-Jones test is used to examine possible nonlinear causality and the results indicate causality from stock prices to exchange rates in Japan and weak causality of the reverse direction in Switzerland. |
| Keywords: | Granger Causality; Stock Prices; Exchange Rates, Hiemstra-Jones Test, Nonparametric Causality. |
| JEL: | G15 C32 |
| Date: | 2010–01 |
| URL: | http://d.repec.org/n?u=RePEc:mcd:mcddps:2010_01&r=ifn |
| By: | Christa Magerl (WIFO); Franz R. Hahn (WIFO) |
| Abstract: | In this paper we make an attempt to extend the WIFO trade-weighted exchange rate index (TWI_ER) by computing export-weighted exchange rate indices for eight Austrian manufacturing industries covering the period from 1995 to 2005. The TWI_ER by manufacturing industries improves upon the previous WIFO-TWI by calculating both current single (bilateral) and current double (multilateral) export weights for each year under investigation. We also present stylised facts based on this unique dataset concerning foreign market share dynamics and the relationship between international competitiveness and improvement in international performance at an industry level. |
| Date: | 2010–02–19 |
| URL: | http://d.repec.org/n?u=RePEc:wfo:wpaper:y:2010:i:357&r=ifn |
| By: | Ito, Hiro (Portland State University); Jongwanich, Juthathip (Asian Development Bank); Terada-Hagiwara, Akiko (Asian Development Bank) |
| Abstract: | The pullbacks of capital inflows to developing Asia following the onset of the global financial crisis in 2008 have brought renewed attention to the role and benefits of financial globalization. A number of notable distinctions between the current global crisis and the Asian financial crisis have become evident. Solid domestic institutions, especially in the financial sector; swift policy responses; and a sound macroeconomic environment with adequate reserves have helped the region to manage well the adverse impacts of the global crisis. Empirical analysis examining the link between capital account openness and output volatility reveals that a developing country with a more open capital market tends to experience lower output volatility, contrary to what might be expected. It is also found that countries can mitigate the destabilizing effect of pursuing greater exchange rate stability by holding a sufficiently high level of foreign reserves. Furthermore, if they want to reap the benefit of financial liberalization to reduce output volatility, highly integrated economies need to be equipped with highly developed financial markets, particularly of banking and stock markets. |
| Keywords: | financial globalization; capital markets; financial integration; economic stability |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:ris:adbewp:0181&r=ifn |
| By: | Park, Donghyun (Asian Development Bank); Estrada, Gemma (Asian Development Bank) |
| Abstract: | Sovereign wealth funds (SWFs) have emerged in developing Asia as a policy response to an unprecedented accumulation of foreign exchange (FX) reserves since 2000. At the same time, developing countries have become an increasingly important source of outward foreign direct investment (FDI). The central objective of this paper is to evaluate the prospects for SWFs to serve as a major conduit for the region’s outward FDI. In principle, FDI represents an attractive means of earning higher returns on FX reserves than traditional reserve assets. In practice, the limited institutional capacity and the political sensitivity of state-led FDI severely constrains the ability of developing Asia’s SWFs to undertake FDI on a significant scale. Therefore, the potential for developing Asia’s SWFs to become major sources of outward FDI is more apparent than real. This paper also explores the implications of the Santiago Principles and the global financial crisis on outward FDI by SWFs. |
| Keywords: | Sovereign wealth fund; FDI; capital flows; foreign exchange reserves; Asia |
| JEL: | F21 F23 |
| Date: | 2009–08 |
| URL: | http://d.repec.org/n?u=RePEc:ris:adbewp:0169&r=ifn |
| By: | Demirbas, Dilek (Newcastle Business School); Patnaik, Ila (National Institute of Public Finance and Policy); Shah, Ajay (National Institute of Public Finance and Policy) |
| Abstract: | FDI by firms in developing countries is a recent phenomenon and demands a study of relationship between firm productivity and different modes of globalisation activities. This paper attempts to understand this relationship through ordered probit models, examining two key hypotheses using firm level panel data from India. First, we test whether there are characteristic differences between domestic firms, exporting firms and firms engaging with FDI. Second, we test if FDI is an integral part of the evolution of firms in developing countries. Our results suggest that there are strong differences between domestic firms, exporting firms, and firms that invest abroad, especially in their knowledge investment, indicating the presence of a ladder of quality in graduating to globalisation. |
| Date: | 2010–02 |
| URL: | http://d.repec.org/n?u=RePEc:npf:wpaper:10/65&r=ifn |
| By: | Sebnem Kalemli-Ozcan; Bent Sørensen; Vadym Volosovych |
| Abstract: | We investigate the relationship between financial integration and output volatility at micro and macro levels. Using a very large firm-level dataset from EU countries over time, we construct a measure of "deep" financial integration at the regional level based on foreign ownership at the firm level. We find a positive effect of foreign ownership on volatility of firms' outcomes. This effect survives aggregation and carries over to regional output. Exploiting variation in the transposition dates of EU-wide legislation, we find that high trust regions in countries who harmonized capital markets sooner have higher levels of financial integration and volatility. |
| JEL: | E32 F15 F36 O16 |
| Date: | 2010–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:15900&r=ifn |
| By: | Küçük, Ugur N. |
| Abstract: | Over the last decade emerging market (EM) sovereign debt has become a firmly established strategic asset class. Besides Dollar-denominated debt, local currency emerging market debt has also been developing to become an attractive and complementary investment asset class. EM countries have been successful to reduce currency mismatches and maturity problems by implementing sound fiscal and monetary policies. Analyzing the period from 2002 to July 2009, we show that the local currency debt provides significant additional alpha and diversification to traditional bond portfolios. In particular, first, EM local currency bond returns are less correlated to the US stock market, treasury and high-yield bond markets, and global risk premia compared to the a case of EM equity and Dollar-denominated bond markets. Second, we document that yields and excess returns on local currency debt depend largely on expected depreciation of the exchange rate against Dollar, while excess returns on Dollar-denominated EM debt are for the most part compensation for bearing the global risk. Third, we report that EM sovereign local currency bond returns beat other emerging market and mature market asset classes by providing higher risk adjusted excess returns and diversification. We believe that our results will have important policy implications not only for international investors but also for the EM governments. We suggest that the development of local currency bond markets in EM countries could contribute to global financial stability by reducing currency mismatches and reliance on foreign currency debt, which in turn is linked to growth and poverty reduction. |
| Keywords: | Sovereign Bond Market; Local Currency Bonds; Emerging Markets; Bond Portfolio; Excess Returns |
| JEL: | G1 G11 G15 |
| Date: | 2009–08–21 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:21878&r=ifn |
| By: | Prasad, Eswar (Cornell University); Gu, Grace (Cornell University) |
| Abstract: | China and the U.S. have a close but complicated economic relationship. This note provides a fuller picture of the tightening embrace between the two countries – in terms of flows of goods and services, financial capital and people – and discusses the potential flashpoints in this relationship. This bilateral relationship is important not just for the principals but also for the broader world economy as the cooperative or conflicted nature of this relationship will set the tone for progress on a number of multilateral issues, including reform of the international monetary system and tackling climate change. |
| Keywords: | China-U.S. relationship, China's exchange rate regime, renminbi, trade |
| JEL: | F3 F4 F5 |
| Date: | 2009–11 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izapps:pp13&r=ifn |
| By: | Margarida Abreu; Victor Mendes; João A. Santos |
| Abstract: | This paper investigates whether investors’ domestic experience helps them enter foreign markets. We show that investors first invest in domestic securities and only some time later they invest abroad in foreign securities. We also show that investors who trade more often in the domestic market start to invest abroad earlier. Our findings suggest that the experience investors acquire while they trade in the domestic market is a key reason why active investors enter the foreign market earlier. A reason is that highly educated investors as well as investors with more financial knowledge, arguably those for whom learning by trading is the least important, do not need to trade as much in the domestic market before they start investing in foreign securities. Another reason is that investors who start investing in foreign securities are able to improve on their performance afterwards. This improvement in performance constitutes further evidence that the home country bias is costly, thereby confirming that there are gains for investors from investing abroad. |
| Keywords: | Learning, home country bias, duration analysis. |
| JEL: | G11 G15 F30 |
| Date: | 2010–01 |
| URL: | http://d.repec.org/n?u=RePEc:ise:isegwp:wp22010&r=ifn |
| By: | Christiansen, Charlotte (CREATES); Ranaldo, Angelo (Swiss National Bank); Söderlind, Paul (University of St. Gallen) |
| Abstract: | We explain the currency carry trade performance using an asset pricing model in which factor loadings are regime-dependent rather than constant. Empirical results show that a typical carry trade strategy has much higher exposure to the stock market and is mean-reverting in regimes of high FX volatility. The findings are robust to various extensions, including more currencies, longer samples, transaction costs, international stock indices, and other proxies for volatility and liquidity. Our regime-dependent pricing model provides significantly smaller pricing errors than a traditional model. Thus, the carry trade performance is better explained by its time-varying systematic risk that magnifies in volatile markets—suggesting a partial explanation for the Uncovered Interest Rate Parity puzzle. |
| Keywords: | carry trade; factor model; FX volatility; liquidity; smooth transition regression; time-varying betas |
| JEL: | F31 G11 G15 |
| Date: | 2009–11–25 |
| URL: | http://d.repec.org/n?u=RePEc:ris:snbwpa:2010_001&r=ifn |
| By: | Beata S. Javorcik; Mariana Spatareanu |
| Abstract: | Many countries strive to attract foreign direct investment (FDI) hoping that knowledge brought by multinationals will spill over to domestic industries and increase their productivity. While the empirical studies have cast doubt on the existence of horizontal spillovers from FDI in developing countries, several recent papers have confirmed the presence of vertical spillovers, which take place through contacts between foreign affiliates and their local suppliers. However, the existing studies rely on industry-level proxies for vertical spillovers rather than information on actual relationships between local companies and multinationals. This study goes one step further by employing a unique dataset from the Czech Republic, which allows us to identify local firms supplying multinationals operating in the country. The data suggest that suppliers are different from other firms. They are larger, have a higher capital-labor ratio, pay higher wages and exhibit a higher productivity level. The evidence is suggestive of both high productivity firms having a higher probability of supplying multinationals as well as suppliers learning from their relationships with multinationals. |
| Keywords: | foreign direct investment, technological spillovers, suppliers |
| JEL: | F21 F23 |
| Date: | 2009–09 |
| URL: | http://d.repec.org/n?u=RePEc:run:wpaper:2009-004&r=ifn |
| By: | Sinha, Pankaj; Sinha, Gyanesh |
| Abstract: | In the past decades, there has been an unprecedented increase in cross border transactions between countries in terms of goods and financial flows. This integration has been fuelled by search of lower risk investments, risk diversification, search for cost effective and more efficient factors of production and dreams of global dominance in the world wide market place. An important result of these capital flows was its impact on linkages of global asset returns and spillover of volatility from one capital market to another. This study aims to understand the spillover effect between the US, the Japan capital markets and Indian equity index (Sensex). We analyze whether the volatility spillover is contemporaneous (directly in the very same day), or dynamic/lagged (with one day lag). A GARCH (1,1) model of modelling volatility has been undertaken for this purpose. This paper concludes that contemporary volatility of the Japan capital markets influenced Sensex in the pre-recession period but in the post recession there was no significant contemporaneous spillover from USA and Japan capital markets to Sensex. However, US became a significant factor while considering dynamic spillover in the post recession era. Also, there was no bidirectional volatility spillover from India to US. But, the study showed evidence of dynamic volatility spillover from Indian market to Japanese Capital market. |
| Keywords: | Volatility; Spillover; GARCH; Recession effects |
| JEL: | C51 C50 G15 C22 C01 F39 |
| Date: | 2010–04–06 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:21873&r=ifn |
| By: | Claudia M. Buch; Iris Kesternich; Alexander Lipponer |
| Abstract: | Recent literature on multinational firms has stressed the importance of low productivity as a barrier to the cross-border expansion of firms. But firms may also need external fi-nance to shoulder the costs of entering foreign markets. We develop a model of multina-tional firms facing real and financial barriers to foreign direct investment (FDI), and we analyze their impact on the FDI decision (the extensive margin) and foreign affiliate sales (the intensive margin). We provide empirical evidence based on a detailed dataset of German multinationals which contains information on parent-level and affiliate-level financial constraints as well as about the location the foreign affiliates. We find that fi-nancial factors constrain firms’ foreign investment decisions, an effect felt in particular by large firms. Financial constraints at the parent level matter for the extensive, but less so for the intensive margin. For the intensive margin, financial constraints at the affiliate level are relatively more important. |
| Keywords: | multinational firms, heterogeneity, productivity, financial con-straints |
| JEL: | F2 G2 |
| Date: | 2009–11 |
| URL: | http://d.repec.org/n?u=RePEc:iaw:iawdip:54&r=ifn |
| By: | Arjana Brezigar-Masten (Institute of Macroeconomic Analysis and Development - IMAD); Fabrizio Coricelli (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, CEPR - Centre for Economic Policy Research); Igor Masten (University of Ljubljana - Faculty of Economics) |
| Abstract: | This papers provides an empirical analysis of the role of financial development and financial integration in the growth dynamics of transition countries. We focus on the role of financial integration in determining the impact of financial development on growth, distinguishing "normal times" from periods of financial crises. In addition to confirming the significant positive effect on growth exerted by financial development and financial integration, our estimates show that a higher degree of financial openness tends to reduce the contractionary effect of financial crises, by cushioning the effect on the domestic supply of credit. Consequently, the high reliance on international capital flows by transition countries does not necessarily increase their financial fragility. This implies that financial protectionism is a self-defeating policy, at least for transition countries. |
| Keywords: | Transition economies, financial integration, financial crises, economic growth, threshold effects. |
| Date: | 2010–02 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cesptp:halshs-00469499_v1&r=ifn |
| By: | Yan Bai (Arizona State University); Jing Zhang (University of Michigan) |
| Abstract: | Conventional wisdom suggests that financial liberalization can help countries insure against idiosyncratic risk. There is little evidence, however, that countries have increased risk sharing despite recent widespread financial liberalization. This work shows that the key to understanding this puzzling observation is that conventional wisdom assumes frictionless international financial markets, while actual international financial markets are far from frictionless. In particular, financial contracts are incomplete and enforceability of debt repayment is limited. Default risk of debt contracts constrains borrowing, and more importantly, it makes borrowing more difficult in bad times, precisely when countries need insurance the most. Thus, default risk of debt contracts hinders international risk sharing. When countries remove their official capital controls, default risk is still present as an implicit barrier to capital flows; the observed increase in capital flows under financial liberalization is in fact too limited to improve risk sharing. If default risk of debt contracts were eliminated, capital flows would be six times greater, and international risk sharing would increase substantially. |
| Keywords: | international risk sharing, financial integration, financial liberalization, financial frictions, sovereign default, international capital flows |
| JEL: | F02 F34 F36 F41 |
| Date: | 2009–05 |
| URL: | http://d.repec.org/n?u=RePEc:mie:wpaper:594&r=ifn |
| By: | Julia Darby (Department of Economics, University of Strathclyde); Rodolphe Desbordes (Department of Economics, University of Strathclyde); Ian Wooton (Department of Economics, University of Strathclyde) |
| Abstract: | This paper investigates whether the higher prevalence of South multinational enterprises (MNEs) in risky developing countries may be explained by the experience that they have acquired of poor institutional quality at home. We confirm the intuitions provided by our analytical model by empirically showing that the positive impact of good public governance on foreign direct investment (FDI) in a given host country is moderated significantly, and even in some cases eliminated or reversed, when MNEs have had prior experience of poor institutional quality at home. |
| Keywords: | South-South FDI; public governance; institutions |
| JEL: | F22 |
| Date: | 2010–02 |
| URL: | http://d.repec.org/n?u=RePEc:str:wpaper:1003&r=ifn |
| By: | Park, Donghyun (Asian Development Bank); Shin, Kwanho (Korea University) |
| Abstract: | Developing Asia has traditionally relied on exports to the United States (US) and other industrialized countries for demand and growth. As a result, the collapse of exports to the US and other industrialized countries during the global financial and economic crisis has sharply curtailed gross domestic product (GDP) growth across the region. The emergence of the People’s Republic of China (PRC) as a globally influential economic force is fueling hopes that it can supplement the US as an additional source of demand and growth. The central objective of this paper is to use vector autoregression (VAR) models to empirically investigate whether exports to the PRC have a significant and positive effect on the GDP of nine developing Asian countries. The study’s results from a three-variable VAR model indicate that PRC’s imports have a significant positive effect on the GDP of regional countries. However, the study’s results from a four-variable VAR model indicate that the PRC’s apparently positive impact reflects the US’ demand for Asian goods, rather than independent demand from the PRC. Therefore, overall, the study’s evidence suggests that the PRC is not yet an engine of growth for the rest of the region. |
| Keywords: | China; Asia; trade; engine; recovery; growth; VAR |
| JEL: | F10 F14 F43 |
| Date: | 2009–10 |
| URL: | http://d.repec.org/n?u=RePEc:ris:adbewp:0175&r=ifn |
| By: | Michael B Devereux (University of British Columbia); James Yetman (Bank for International Settlements) |
| Abstract: | Recent macroeconomic experience has drawn attention to the importance of interdependence among countries through financial markets and institutions, independently of traditional trade linkages. This paper develops a model of the international transmission of shocks due to interdependent portfolio holdings among leverage-constrained financial institutions. In the absence of leverage constraints, international portfolio diversification has no implications for macroeconomic co-movements. When leverage constraints bind, however, the presence of diversified portfolios in combination with these constraints introduces a powerful financial transmission channel which results in a high correlation among macroeconomic aggregates during business cycle downturns, quite independent of the size of international trade linkages. |
| Keywords: | leverage; international transmission; portfolios |
| JEL: | F3 F32 F34 |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:rba:rbardp:rdp2009-08&r=ifn |
| By: | Takagi, Shinji (Asian Development Bank Institute) |
| Abstract: | Responding to the severe negative impact of the recent global financial crisis, many Asian economies resorted to substantial easing of macroeconomic policies. This policy brief reviews the principal policy measures implemented, examines the issues that have emerged from this extraordinary experience, and concludes with a forward-looking discussion of medium- to longer-term measures to improve the effectiveness of macroeconomic policies and to make the world and the region a safer place. |
| Keywords: | asian eased macroeconomic polices; global financial crisis; macroeconomic policy issues |
| JEL: | F00 |
| Date: | 2009–12–18 |
| URL: | http://d.repec.org/n?u=RePEc:ris:adbipb:0032&r=ifn |
| By: | Farayi Gwenhamo; Johannes Fedderke |
| Abstract: | This paper investigates the determinants of the absolute volumes and composition of foreign capital stocks in South Africa, focusing on the role played by institutional quality (property rights), domestic risk and neighbourhood effects as potential determinants. The empirical findings show that secure property rights and low risk in the host country positively affect the absolute volumes of both long-term and short-term foreign capital, but tilt the composition of foreign capital in favour of long-term foreign capital. The empirical results also demonstrate the existence of neighbourhood effects where the institutional environment in Zimbabwe has a significant impact on South Africa's foreign capital in.ows. It is shown that weak property rights in Zimbabwe lead to an increase in South Africa's foreign direct investment (FDI), but a reduction in South Africa's portfolio investment. This suggests that Zimbabwe and South Africa compete for foreign direct investment in similar sectors, and present two alternative investment destinations to foreign investors. As such, when property rights in Zimbabwe worsen, FDI appears to switch to South Africa as an alternative. By contrast, poor property rights in Zimbabwe appear to raise the perceived risk for portfolio investment in South Africa. |
| Keywords: | Foreign capital stocks, Composition, FDI, Portfolio Investment and South Africa |
| JEL: | F21 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:rza:wpaper:163&r=ifn |
| By: | Carvalho, Flavia (UNU-MERIT, Maastricht University); Costa, Ionara (UNU-MERIT, Maastricht University); Duysters, Geert (UNU-MERIT, Maastricht University, and Eindhoven University of Technology) |
| Abstract: | This chapter discusses general patterns of internationalization of Brazilian firms. It highlights the main determinants for internationalization, the main destinations, as well as the modes of entry that Brazilian firms employ overseas. The paper also discusses some aspects related to the technological capabilities of Brazilian firms that are related to their internationalization strategies, in terms of both the exploitation of such advantages and the search for technological assets abroad. |
| Keywords: | foreign direct investments, multinationals, emerging markets, internationalization strategies |
| JEL: | F23 O19 O54 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:unumer:2010016&r=ifn |
| By: | Nuri Yildirim (Yildiz Technical University); Huseyin Tastan (Yildiz Technical University) |
| Abstract: | In this paper we study the interactions and feedbacks between three categories of net capital flows and growth in the Turkish economy for the 1992:01-2009:01 period using frequency domain techniques. Our main spectral analysis tool is a new version of the causality test of Geweke (1982) and Hosoya (1991) in the frequency domain developed by Breitung and Candelon (2006). Besides, we make use of other tools of spectrum analysis such as cospectrum, squared coherence, phase and gain spectrums to decompose total covariance between capital flows and growth across main frequency bands and capture lead/lag interactions between them. Some of our empirical findings are as follows: Variance decompositions over frequency bands reveal that variations in individual capital flow categories are concentrated over high (seasonal) frequencies. We found no feedback from short-term and long-term ‘other’ investments to growth in these frequencies. However, there are highly significant feedbacks from growth to short-term and long-term capital inflows over business cycle and seasonal frequencies. Spectral variance decompositions reveal that, in general, percentage of variation in capital flows due to economic growth is much higher than the percentage of variation in growth due to capital flows. |
| Keywords: | Capital flows, causality in frequency domain, Geweke’s measure of feedback, Turkey |
| JEL: | C32 F21 F32 F43 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:tek:wpaper:2009/2&r=ifn |