nep-ifn New Economics Papers
on International Finance
Issue of 2010‒06‒18
ten papers chosen by
Ajay Shah
National Institute of Public Finance and Policy

  1. Choice of exchange rate regimes for African countries: Fixed or Flexible Exchange rate regimes? By Simwaka, Kisu
  2. Exchange Rate Misalignments and World Imbalances: A Fundamental Equilibrium Exchange Rate Approach for Emerging Countries By Nabil Aflouk; Jacques Mazier; Jamel Saadaoui
  3. Episodic Nonlinearity in Leading Global Currencies By Serletis, Apostolos; Malliaris, Anastasios; Hinich, Melvin; Gogas, Periklis
  4. Long Memory and Fractional Integration in High Frequency Financial Time Series By Guglielmo Maria Caporale; Luis A. Gil-Alana
  5. Intra-Day-Patterns in the Colombian Exchange Market Index and VAR: Evaluation of Different Approaches By Julio César Alonso; Manuel Serna Cortés
  6. The Location Choices of Foreign Investors: A District-level Analysis in India By Megha Mukim; Peter Nunnenkamp
  7. The African Credit Trap By Svetlana Andrianova; Badi Baltagi; Panicos Demetriades; David Fielding
  8. Surviving the Global Financial Crisis: Foreign Direct Investment and Establishment Performance By Laura Alfaro; Maggie Chen
  9. Do Additional Bilateral Investment Treaties Boost Foreign Direct Investments? By Chang Hoon Oh; Michele Fratianni
  10. Market models for CDOs driven by time-inhomogeneous L\'evy processes By Ernst Eberlein; Zorana Grbac; Thorsten Schmidt

  1. By: Simwaka, Kisu
    Abstract: The choice of an appropriate exchange rate regime has been a subject of ongoing debate in international economics. The majority of African countries are small open economies and thus where the choice of the exchange rate regime is an important policy issue. Aside from factors such as interest rates and inflation, the exchange rate is one of the most important determinants of a country’s relative level of economic health. For this reason, exchange rates are among the most watched analyzed and governmentally manipulated economic variables. This paper revisits the debate on the choice of an appropriate exchange-rate regime for African countries. It starts by reviewing literature on the debate of appropriate exchange rate regimes. It then discusses relevant considerations for the choice of the exchange rate regimes for African countries. The debate revolves around the effect of exchange rate on macroeconomic management, particularly inflation and export competitiveness. The paper recommends the conventional peg arrangement as a viable option for the majority of low-income African countries. But this is contingent on a number of important pre-conditions. For middle-income African economies, with relatively developed financial markets and linkages to modern global capital markets, floating arrangements, including the managed floating exchange rate regime, look more promising. In conclusion, the paper cautions that no single exchange rate regime is right for all countries or at all times.
    Keywords: Exchange rate options; sub-Saharan African countries
    JEL: F30 F31 F33
    Date: 2010–03–15
  2. By: Nabil Aflouk (CEPN - Centre d'économie de l'Université de Paris Nord - CNRS : UMR7115 - Université Paris-Nord - Paris XIII); Jacques Mazier (CEPN - Centre d'économie de l'Université de Paris Nord - CNRS : UMR7115 - Université Paris-Nord - Paris XIII); Jamel Saadaoui (CEPN - Centre d'économie de l'Université de Paris Nord - CNRS : UMR7115 - Université Paris-Nord - Paris XIII)
    Abstract: Since the mid-1990s, the world imbalances have increased significantly with a large US current deficit facing Asian surpluses, mainly Chinese. Since 2007, a partial reduction of these imbalances has been obtained, largely thanks to production's decreases, without large exchange rate adjustments. The Asian surpluses have remained important. The objective of this paper is to examine the exchange rate misalignments (ERM) of the main emerging countries in Asia and Latin America since the 1980s, so as to shed light on the 2000s by a long term analysis and compare with the industrialized countries' case. Our results confirm that ERM have been reduced since the mid-2000s at the world level, but the dollar remained overvalued against the East Asian countries, except the yen. Chinese, Indian and Brazilian exchange rate policies have been much contrasted since the 1980s. The Indian rupee has been more often overvalued while a more balance situation prevailed in Brazil only since the 2000s. The Latin American countries have faced wider and more dispersed ERM and current imbalances than East Asian countries. But Argentina, Chile and Uruguay benefits now of undervalued currencies while Mexico is closer to equilibrium.
    Keywords: Equilibrium Exchange Rate, Current Account Balance, Macroeconomic Balance, Emerging Countries
    Date: 2010–05–27
  3. By: Serletis, Apostolos (University of Calgary); Malliaris, Anastasios (Loyola University of Chicago); Hinich, Melvin (The University of Texas at Austin); Gogas, Periklis (Democritus University of Thrace, Department of International Economic Relations and Development)
    Abstract: We perform non-linearity tests using daily data for leading currencies that include the Australian dollar, British pound, Brazilian real, Canadian dollar, euro, Japanese yen, Mexican peso, and the Swiss franc to resolve the issue of whether these currencies are driven by fundamentals or exogenous shocks to the global economy. In particular, we use a new method of testing for linear and nonlinear lead/lag relationships between time series, introduced by Brooks and Hinich (1999), based on the concepts of cross-correlation and cross-bicorrelation. Our evidence points to a relatively rare episodic nonlinearity within and across foreign exchange rates. We also test the validity of specifying ARCH-type error structures for foreign exchange rates. In doing so, we estimate Bollerslevs (1986) general- ized ARCH (GARCH) model and Nelsons (1988) exponential GARCH (EGARCH) model,using a variety of error densities [including the normal, the Student-t distribution, and the Generalized Error Distribution (GED)] and a comprehensive set of diagnostic checks. We apply the Brooks and Hinich (1999) nonlinearity test to the standardized residuals of the optimal GARCH/EGARCH model for each exchange rate series and show that the nonlinearity in the exchange rates is not due to ARCH-type e¤ects. This result has important implications for the interpretation of the recent voluminous literature which attempts to model fi nancial asset returns using this family of models.
    Keywords: Global nancial markets; Currencies; Episodic nonlinearity; Conditional heteroskedasticity.
    JEL: C22 C45 D40 G10 Q40
    Date: 2010–06–07
  4. By: Guglielmo Maria Caporale; Luis A. Gil-Alana
    Abstract: This paper analyses the long-memory properties of high frequency financial time series. It focuses on temporal aggregation and the influence that this might have on the degree of dependence of the series. Fractional integration or I(d) models are estimated with a variety of specifications for the error term. In brief, we find evidence that a lower degree of integration is associated with lower data frequencies. In particular, when the data are collected every 10 minutes there are several cases with values of d strictly smaller than 1, implying mean-reverting behaviour. This holds for all four series examined, namely Open, High, Low and Last observations for the British pound/US dollar spot exchange rate.
    Keywords: High frequency data; long memory; volatility persistence; structural breaks
    JEL: C22
    Date: 2010
  5. By: Julio César Alonso; Manuel Serna Cortés
    Abstract: This paper evaluates the performance of 17 different parametric and non-parametric specifications and high frequency data for Colombian exchange market index (IGBC). We model the variance of the 10-minute returns using GARCH-M and TGARCH models that take in account the leverage effect, the day-of-the-week effect, and the hour-of-the-day effect. We estimate those models under two assumptions of the behavior of the returns: Normal distribution and t distribution. This exercise is performed for two different ten-minute intraday samples: 2006-2007 and 2008-2009. For the first sample, we found that the best model is a GARCH-M (1,1) with the hour-of-the-day effect. For the 2008-2009 sample, we found that the model with the correct conditional VaR coverage would be the GARCH-M with the day-of-the-week effect, and the hour-of-the-day effect.
    Date: 2010–06–12
  6. By: Megha Mukim; Peter Nunnenkamp
    Abstract: This paper analyzes the determinants of the location choices made by foreign investors at the district level in India to gauge the relative importance of economic geography factors, local business conditions, and the presence of previous foreign investors. We employ a discrete-choice model and Poisson regressions to control for the potential violation of the assumption of Independence of Irrelevant Alternatives. Our sample includes about 19,500 foreign investment projects approved in 447 districts from 1991-2005. We find that foreign investors strongly prefer locations where other foreign investors are. They are also attracted to industrially diverse locations and those with better infrastructure. We conclude that the concentration of FDI in a few locations could fuel regional divergence in post-reform India
    Keywords: FDI, economic geography, location choice, infrastructure
    JEL: F23 R12
    Date: 2010–06
  7. By: Svetlana Andrianova; Badi Baltagi; Panicos Demetriades; David Fielding
    Abstract: We put forward a plausible explanation of African financial underdevelopment in the form of a bad credit market equilibrium. Utilising an appropriately modified IO model of banking, we show that the root of the problem could be unchecked moral hazard (strategic loan defaults) or adverse selection (a lack of good projects). We provide empirical evidence from a large panel of African banks which suggests that loan defaults are a major factor inhibiting bank lending when the quality of regulation is poor. We also find that once a threshold level of regulatory quality has been reached, improvements in the default rate or regulatory quality do not matter, providing support for our theoretical predictions.
    Keywords: Dynamic panel data; African financial under-development; African credit markets
    JEL: G21 O16
    Date: 2010–05
  8. By: Laura Alfaro (Harvard Business School, Business, Government and the International Economy Unit); Maggie Chen (George Washington University)
    Abstract: We examine in this paper the differential response of establishments to the global financial crisis, with particular emphasis on the role of foreign direct investment (FDI) in determining micro economic performance. Using a new worldwide dataset that reports the activities of more than 12 million establishments before and after 2008, we investigate how multinationals around the world responded to the crisis relative to local firms. We explore three distinct channels through which FDI affects establishment performance, (i) production linkages, (ii) financial linkages, and (iii) multinational networks. Our analysis shows that while multinational owned establishments performed, on average, better than their local competitors, there is considerable heterogeneity in the role of FDI. First, multinationals located in countries that experienced sharper declines in aggregate output, demand, and credit conditions displayed a greater advantage over local firms. Multinationals headquartered in countries with a greater incidence of the crisis, in contrast, fared less satisfactorily abroad. Second, multinationals that engaged in activities with vertical production linkages or stronger financial constraints exhibited particularly better responses compared to local firms. Finally, being part of a larger multinational network also led to superior economic performance.
    Keywords: global financial crisis, establishment response, foreign direct investment, production linkage, financial linkage, network
    JEL: F2 F1
    Date: 2010–06
  9. By: Chang Hoon Oh (Faculty of Business, Brock University); Michele Fratianni (Department of Business Economics and Public Policy, Indiana University Kelley School of Business)
    Abstract: This paper finds that the stock of bilateral investment treaties (BIT) is subject to diminishing returns measured in terms of foreign direct investment flows. Diminishing returns are more pronounced among country-pairs that have not signed bilateral investment treaties but have their own BIT network than among country-pairs with their own bilateral investment treaties. For a given country’s BIT network, a multinational enterprise finds more value in investing where a bilateral treaty is in place. This may suggest either stronger property-rights protection or greater latitude to use the host country as an export platform. Our subsidiary finding is that an index of a country’s BIT network diversity appears to be a plausible explanation of the limiting force underlying the diminishing returns of the stock of BITs in a world where there is a mix between horizontally and vertically integrated multinational enterprises.
    Keywords: bilateral investment treaty; foreign direct investment; gravity equation; network diversity
    JEL: F21 F53
    Date: 2010–06
  10. By: Ernst Eberlein; Zorana Grbac; Thorsten Schmidt
    Abstract: This paper considers a top-down approach for CDO valuation and proposes a market model. We extend previous research on this topic in two directions: on the one side, we use as driving process for the interest rate dynamics a time-inhomogeneous L\'evy process, and on the other side, we do not assume that all maturities are available in the market. Only a discrete tenor structure is considered, which is in the spirit of the classical Libor market model. We create a general framework for market models based on multidimensional semimartingales. This framework is able to capture dependence between the default-free and the defaultable dynamics, as well as contagion effects. Conditions for absence of arbitrage and valuation formulas for tranches of CDOs are given.
    Date: 2010–06

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