nep-ifn New Economics Papers
on International Finance
Issue of 2010‒09‒18
seventeen papers chosen by
Ajay Shah
National Institute of Public Finance and Policy

  1. A Case for Intermediate Exchange-Rate Regimes By Veronique Salins; Agnes Benassy-Quere
  2. Exchange Rate and Industrial Commodity Volatility Transmissions, Asymmetries and Hedging Strategies By Shawkat M. Hammoudeh; Yuan Yuan; Michael McAleer
  3. An Analysis of Exchange Rate Regime Duration By Hossain, Monzur
  4. The determinants of cross-border bank flows to emerging markets: New empirical evidence on the spread of financial crises By Herrmann, Sabine; Mihaljek, Dubravko
  5. Understanding the ADR premium under market segmentation By Matthieu Stigler; Ajay Shah; Ila Patnaik
  6. The Asia Financial Crises and Exchange Rates By Oga, Takashi; Polasek, Wolfgang
  7. Pessimistic Foreign Investors and Turmoil in Emerging Markets: the case of Brazil in 2002 By Sandro C. Andrade; Emanuel Kohlscheen
  8. Malaysia’s Outward FDI: The Effects of Host Market Size and Home Government Policy By Soo Khoon Goh; Koi Nyen Wong
  9. Microeconomic consequences and macroeconomic causes of foreign direct investment in southern African economies By Lederman, Daniel; Mengistae, Taye; Xu, Lixin Colin
  10. On the Globalness of Emerging Multinationals: A Study of Indian MNEs By Aggarwal, Raj; Pradhan, Jaya Prakash
  11. Limits to arbitrage during the crisis: funding liquidity constraints and covered interest parity By Mancini Griffoli, Tommaso; Ranaldo, Angelo
  12. Creditor discrimination during sovereign debt restructurings By Aitor Erce; Javier Díaz-Cassou
  13. Cost of Borrowing, Institutional Quality, and Capital Openness By Gabriel Martinez
  14. The Impact of the 2007-2010 Crisis on the Geography of Finance By Gunther Capelle-Blancard; Yamina Tadjeddine
  15. Multiple Regime Shifts: The Influence of ASEAN Politics on Financial Integration within South-East Asia By David Treisman
  16. From Estimation Results to Stylized Facts: Twelve Recommendations for Empirical Research in International Activities of Heterogeneous Firms By Wagner, Joachim
  17. Locational Determinants of Acquisitions from China and India: The Role of Human Capital By Filip De Beule

  1. By: Veronique Salins; Agnes Benassy-Quere
    Abstract: Despite increasing capital mobility and the subsequent difficulty in controlling exchange rates, intermediate exchange-rate regimes have remained widespread, especially in emerging and developing economies. This piece of evidence hardly fits the "impossible Trinity" theory arguing that it becomes difficult to control the exchange rate without a "hard" device when capital flows are freed. Calvo and Reinhart (2000) have suggested several explanations for such "fear of floating": exchange rate pass-through, liability dollarization, dollar invoicing of domestic and external transactions, and an underdeveloped market for currency hedging make it more desirable to stabilize the nominal exchange rate. However, the New-Keynesian model, which has become the main workhorse for studying exchange-rate regime choice since the 1990s, typically opposes fixed nominal pegs to free-floating regime, without considering intermediate regimes. We intend to fill this gap here by comparing the performance of "extreme" regimes to that of an intermediate regime where monetary authorities care both about inflation and about nominal exchange-rate deviations from the steady state, when a small economy is hit by several types of shocks. Without nominal wage rigidities, our results are in line with the New-Keynesian literature arguing in favor of inflation-targeting regimes. However, when nominal wage rigidities are taken into account, we find the intermediate regime to be appropriate for an economy that is mainly hit by productivity and foreign-interest shocks, which is often the case in emerging and developing economies. The free-floating regime (with inflation targeting) seems more adequate if the economy experiences mostly demand shocks and foreign prices shock. Finally, the fixed peg regime is always dominated by either the free-floating or the intermediate regime. A fully-fledged analysis of intermediate regimes should of course account for the fear-of-floating-type advantages of such regimes, as well as for their shortcomings in terms of costly reserve-accumulation and/or recurrent crises. Our results however suggest that, by concentrating on two extreme regimes (fixed nominal pegs and free floats), by neglecting wage rigidities and/or by assuming that floating countries can engineer an "optimal" interest-rate feedback rule, the existing New-Keynesian literature may have exaggerated the merits of free-floating regimes to the detriment of "soft" pegs.
    Keywords: Exchange-rate regime; DSGE model
    JEL: F33 F41
    Date: 2010–08
  2. By: Shawkat M. Hammoudeh (Lebow College of Business, Drexel University); Yuan Yuan (Lebow College of Business, Drexel University); Michael McAleer (Erasmus School of Economics, Erasmus University Rotterdam)
    Abstract: This paper examines the inclusion of the dollar/euro exchange rate together with four important and highly traded commodities - aluminum, copper, gold and oil- in symmetric and asymmetric multivariate GARCH and DCC models. The inclusion of exchange rate increases the significant direct and indirect past shock and volatility effects on future volatility between the commodities in all the models. Model 2, which includes the business cycle industrial metal copper and not aluminum, displays more direct and indirect transmissions than does Model 3, which replaces the business cycle-sensitive copper with the highly energy-intensive aluminum. The asymmetric effects are the greatest in Model 3 because of the high interactions between oil and aluminum. Optimal portfolios should have more euro currency than commodities, and more copper and gold than oil.
    Date: 2010–05
  3. By: Hossain, Monzur
    Abstract: The analysis of mean duration of exchange rate regime reveals that overall durability of regimes has been declining since the 1970s. The durability of intermediate regimes has decreased to the lowest in the 1990s than those in the 1970s and 1980s, which provides a basis for the hollowing out hypothesis. The changing pattern of regime distribution might be associated with the changing pattern of developmental stage.
    Keywords: Exchange rate regime duration; developmental stage
    JEL: F33
    Date: 2010–08
  4. By: Herrmann, Sabine; Mihaljek, Dubravko
    Abstract: This paper studies the nature of spillover effects in bank lending flows from advanced to the emerging market economies and identifies specific channels through which such effects occur. Based on a gravity model we examine a panel data set on cross-border bank flows from 17 advanced to 28 emerging market economies in Asia, Latin America and central and eastern Europe from 1993 to 2008. The empirical analysis suggests that global as well as country specific factors are significant determinants of cross-border bank flows. Greater global risk aversion and expected financial market volatility seem to have been the most important factors behind the decrease in cross-border bank flows during the crisis of 2007-08. The withdraw of cross-border loans from central and eastern Europe was more limited compared to Asia and Latin America, in large measure because of the higher degree of financial and monetary integration in Europe, and relatively sound banking systems in the region. These results are robust to various specification, sub-samples and econometric methodologies. --
    Keywords: Gravity model,cross-border bank flows,financial crises,emerging market economies,spillover effects,panel data
    JEL: F34 F36 O57 C23
    Date: 2010
  5. By: Matthieu Stigler; Ajay Shah; Ila Patnaik
    Abstract: Capital controls can induce large and persistent deviations from the Law of One Price for cross-listed stocks in international capital markets. A considerable literature has explored rm-specic factors which in uence ADR pricing when LOP is violated. In this paper, we examine the interlinkages between Indian ADR premiums and macroe- conomic time-series. We construct an ADR premium index, whereby diversication across rms diminishes idiosyncratic uctuations asso- ciated with each security. We nd that the S&P 500 index and the domestic Nifty index in uence the ADR Premium Index. Positive shocks to the ADR premium index precede higher purchases by for- eign investors on the domestic market, and precede positive returns on the domestic index. [Working Paper No. 2010-71]
    Keywords: capitalmarketintegration,depositoryreceipts
    Date: 2010
  6. By: Oga, Takashi (Chiba University, Chiba, Japan); Polasek, Wolfgang (Department of Economics and Finance, Institute for Advanced Studies, Vienna, Austria)
    Abstract: We analyse the volatility structure of Asian currencies against the U.S. dollar (USD) for the Thai Baht THB, the Philippine Peso PHP, the Indonesian Rupiah IDR and the South Korean Won KRW. Our goal is to check if the characteristics of the volatility dynamics have changed in a K-state switching AR(1)-GARCH(1,1) model in the last decade 1995-2008 covering the Asian crisis. We estimate the model of Haas et al. (2003) with MCMC and we find that for the four currencies the volatility dynamics has changed at least once.
    Keywords: Markov switching GARCH models, Asian currency crisis 1997, volatility breaks, Bayesian MCMC, model choice
    JEL: F31 C11 C22
    Date: 2010–09
  7. By: Sandro C. Andrade; Emanuel Kohlscheen
    Abstract: Using survey data, we document that foreign-owned institutions became more pessimistic than locally owned institutions about the strength of the Brazilian currency around the 2002 presidential elections. As a result of their relative pessimism, foreign-owned institutions made larger forecast errors. Consistent with the emergence of their relative pessimism, foreign investors heavily sold Brazilian stocks and the Brazilian currency in futures markets ahead of the 2002 elections. Periods of stronger foreign sell-off were associated with larger equity price declines and larger depreciation of the Brazilian Real in spot and futures markets. These results are consistent with foreign investors’ relative lack of knowledge of Brazilian institutions contributing to the sharp depreciation of the Brazilian currency and stock market ahead of the 2002 presidential elections.
    Date: 2010–08
  8. By: Soo Khoon Goh; Koi Nyen Wong
    Abstract: This study estimates the possible determinants of outward FDI from Malaysia by introducing host market size and home government policy on capital outflows using multivariate cointegration and error-correction modeling techniques. The empirical results indicate that there is a positive long-run relationship between Malaysia’s outward FDI and its key determinants, viz. foreign market size, real effective exchange rate, international reserves and trade openness. In order to capitalize on globalization, the main findings suggest that apart from the market-seeking incentive and the adoption of outward-oriented policies, the Malaysian government could also encourage outward FDI by implementing liberal policy on capital outflows. However, this can pose a dilemma to the economy. On one hand, encouraging FDI outflows may tend to retard domestic investment seeing that it has been an important source of economic growth over the last three decades. On the other hand, restricting FDI outflows could discourage potential Malaysian multinational corporations from seizing opportunities abroad and to become regional and international players in the long run. The present study has important policy implications for the country’s economic development and the internationalization of Malaysian firms in the era of globalization.
    Keywords: Outward FDI, Malaysia
    JEL: F21
    Date: 2010–05
  9. By: Lederman, Daniel; Mengistae, Taye; Xu, Lixin Colin
    Abstract: The causes and consequences of foreign direct investment in developing countries remain a subject of debate among researchers and policymakers alike. The authors use international data and a new micro-data set of firms in 13 Southern African developing countries to investigate the benefits and determinants of foreign direct investment in this region. Foreign direct investment appears to have facilitated local development in the region. Foreign firms tend to perform better than domestic firms, tend to be larger, are located in richer and better-governed countries and in countries with more competitive financial intermediaries, and are more likely to export than domestic firms. They also exhibit positive spillover effects to domestic firms. Relying on a standard model to predict the country-level inflows of foreign direct investment per capita, the authors find that Southern African developing countries are attracting the expected level of inflows, at least relative to their income level, human capital, demographic structure, institutions, and economic track record. There are some differences between Southern African developing countries and the rest of the world in foreign direct investment behavior: in Southern African developing countries, the income level is less important and openness more so. The authors use two comparison groups to compare with the region to shed light on why other regions have attracted more foreign direct investment per capita than Southern African developing countries. The factors that explain the region's low inflows of foreign direct investment are economic fundamentals (previous growth rates, average income, phone density, and adult share of the population).
    Keywords: Emerging Markets,Economic Theory&Research,Investment and Investment Climate,Debt Markets,Foreign Direct Investment
    Date: 2010–09–01
  10. By: Aggarwal, Raj; Pradhan, Jaya Prakash
    Abstract: Contrary to contentions in prior literature that emerging multinationals are only regional players, the evidence on the globalness of Indian firms presented in this study suggests that a number of emerging multinationals are global firms. Their strategies are targeted at both the developed and developing markets with the intensity of their overseas operations comparable or far greater than those of the world’s leading multinationals. Many of these firms have greater sales or capital assets outside their home base. Indeed, many of them qualify as global firms as they have a significant presence (over 10 percent of sales) in each of the four regions (triad and the non-triad developing regions) and no one region accounts for more than 50 per cent of their global sales. The study of the transformation of emerging multinationals into non-home region players provides considerable potential for better understanding management theories and practices.
    Keywords: Emerging Multinationals; Globalness; Indian Firms
    JEL: F23
    Date: 2010–09–09
  11. By: Mancini Griffoli, Tommaso (Swiss National Bank); Ranaldo, Angelo (Swiss National Bank)
    Abstract: Arbitrage normally ensures that covered interest parity (CIP) holds. Until recently, excess profits, if any, were documented to last merely seconds and reach a few pips. Instead, this paper finds that following the Lehman bankruptcy, these were large, persisted for months and involved strategies short in dollars. Profits are estimated by specifying the arbitrage strategy as a speculator would actually implement it, considering both unsecured and secured funding. Either way, it seems that dollar funding constraints kept traders from arbitraging away excess profits. The claim finds support in an empirical analysis drawing on several novel high frequency datasets of synchronous quotes across securities, including transaction costs.
    Keywords: arbitrage limits; covered interest parity; funding liquidity; financial crisis
    JEL: F31 G14
    Date: 2010–08–30
  12. By: Aitor Erce (Banco de España); Javier Díaz-Cassou (London School of Economics)
    Abstract: This paper explores patterns of discrimination between residents and foreign creditors during recents sovereign debt restructurings. We analyze 10 recent episodes distinguishing between neutral cases in which the sovereign treated creditors equitably irrespective of their nationality and instances of discrimination against residents and non-residents. We then present evidence in support of the hypothesis that these patterns of discrimination can be explained by the origin of liquidity pressures, the ex ante soundness of the banking system and the extent of the domestic corporate sector’s reliance on international financial markets. On the theoretical side, we present a simple model of a government’s strategic decision to diferentiate between the servicing of its domestic and its external debt. In our model, the basic trade-off facing the authorities is to default on external debt and in so doing restricting private access to international capital markets or to default on domestic debt, thereby curtailing the banking sector’s capacity to lend to domestic firms.
    Keywords: sovereign default, discrimination, bank credit, foreign capital
    JEL: F34 E65
    Date: 2010–09
  13. By: Gabriel Martinez (Department of Economics, Ave Maria University)
    Abstract: Does improving institutional quality lower borrowing costs or raise them? Better institutions the marginal productivity of capital, the demand for funds and the interest rate. They may also lending risks, raising the supply of funds and lowering the cost of capital. Using data from 100 this paper shows that the impact of institutional quality on borrowing costs depends on whether country has favored improving financial institutions, which is proxied by its openness to capital flows, controlling for a host of factors. These results are robust to changes in definitions and specification.
    Keywords: interest rates, institutional quality
    JEL: F34 F36 E44 O16
    Date: 2010–07
  14. By: Gunther Capelle-Blancard; Yamina Tadjeddine
    Abstract: The location of financial activities is traditionally characterized by a great deal of inertia. However, the 2007-10 crisis may considerably modify the geography of finance and cause an upheaval in world hierarchy. The crisis hit the Western countries directly and the main financial centers have been massively losing jobs, especially London and New York. Moreover, in Western countries, the financial industry is on the way to lose the support implicitly provided by governments until the crisis. Indeed, while finance was considered as a first-class position in the international division of labor, the crisis has clearly shown the threats associated with an excessive growth of the financial industry (vulnerability to external shocks, rising of inequalities, etc.). Hence, even within the traditional bastions of finance it is claimed that the financial industry needs to get smaller. At the same time, stock markets in Shanghai, Hong-Kong and Bombay are upstaging them as major players.
    Keywords: Financial geography; international financial centers; globalization; financial crisis; subprime
    JEL: E44 G2 R1
    Date: 2010–08
  15. By: David Treisman
    Abstract: For the last two decades, a key policy objective of the Association of South East Asian Nations (ASEAN), to which it claims much success, has been the supra-national integration among the region’s financial markets. This paper critically appraises this claim by locating and estimating multiple structural breaks in two equity market-based indicators and by employing a method to examine the effects of the ASEAN decision-making regime on variations in South-East Asian equity prices. The main findings of the paper are that the majority of identified structural breaks coincide with regime shifts in the ASEAN decision-making mechanism but that the politics of the regimes has had little influence on supra-national integration of the region’s financial markets.
    Keywords: ASEAN, equity prices, financial markets, integration, politics, structural breaks
    JEL: F36 G12 G15 F42
    Date: 2010–05
  16. By: Wagner, Joachim (Leuphana University Lüneburg)
    Abstract: Heterogeneous firms are at the heart of both the New New International Trade Theory and the Micro-econometrics of International Firm Activities. One important aim of micro-econometric studies is to uncover stylized facts that hold over space and time, and that can both inspire theoretical models that are based on “realistic” assumptions, and inform policy debates in an evidence-based way. Which results from the thousands of empirical estimates reported in the literature on the micro-econometrics of international firm activities do we consider as convincing? Based on my own experience from the last twenty years I use the opportunity of this lecture to make twelve recommendations that, hopefully, will help to find the right way on the thorny road from estimation results to stylized facts. I will deal with the following topics: comparisons of means vs. comparisons of distributions; extremely different firms, or outliers; unobserved heterogeneity; simultaneous occurrence of differences across quantiles, outliers, and unobserved heterogeneity; heterogeneous effects of international firm activities on firm performance; replication; within-study replication by international research teams; meta-analysis; and talking to practitioners.
    Keywords: international firm activities, heterogeneous firms, stylized facts, robust statistics, replication, meta anaysis
    JEL: F14 C21 C23
    Date: 2010–09
  17. By: Filip De Beule
    Abstract: The article will analyze the locational determinants of Chinese and Indian mergers and acquisitions (M and As). Existing literature often indicate that Chinese and Indian multinationals are motivated by access to local markets, natural resources and intangible assets (Deng, 2004; Kaartemo, 2007; Pradhan, 2008). These determinants will be used to analyze the relevant determinants of Chinese and Indian acquisitions. On the basis of several macro-economic determinants the article will analyze the relevant host country characteristics that drive the locational choices of Chinese and Indian M and A, as well as the similarities and differences between these two so-called BRIC countries.
    Keywords: chinese, indian, acquisitions, multinationals, local markets, natural resources, assests, mergers, india, China, Chinese, BRIC countries, macro economic,
    Date: 2010

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