nep-ifn New Economics Papers
on International Finance
Issue of 2010‒11‒27
thirteen papers chosen by
Ajay Shah
National Institute of Public Finance and Policy

  1. Capital Flows and their Impact on the Real Effective Exchange Rate By Jean-Louis COMBES; Tidiane KINDA; Patrick PLANE
  2. International Capital Flows and Aggregate Output By Juergen von Hagen; Haiping zhang
  3. The Great Retrenchment: International Capital Flows During the Global Financial Crisis By Gian-Maria Milesi-Ferretti, Cédric Tille
  4. Determinants of Trade Misinvoicing By Ila Patnaik; Abhijit Sen Gupta; Ajay Shah
  5. Fractional integration and cointegration in stock prices and exchange rates By Marcel Aloy; Mohamed Boutahar; Karine Gente; Anne Peguin-Feissolle
  6. Monetary policy implementation and uncovered interest parity: empirical evidence from Oceania By Alfred Guender; Bevan Cook
  7. Foreign Shareholding: A Decomposition Analysis By Ajay Shah; Ila Patnaik
  8. International capital flows and credit market imperfections: a tale of two frictions By Alberto Martin; Filippo Taddei
  9. The Term Structure of Interest Rates, the Expectations Hypothesis and International Financial Integration: Evidence from Asian Economies By Mark J. Holmes; Jesús Otero; Theodore Panagiotidis
  10. Why a Diversified Portfolio Should Include African Assets By Paul Alagidede; Theodore Panagiotidis; Xu Zhang
  11. Regime shifts in mean-variance efficient frontiers: some international evidence By Massimo Guidolin; Federica Ria
  12. An Empirical Analysis of International Stock Market Volatility Transmission By Indika Karunanayake; Valadkhani, Abbas; O'Brien, Martin
  13. Turkey’s Improving Integration with the Global Capital Market: Impacts on Risk Premia and Capital Costs By Rauf Gönenç; Saygin Sahinöz; Ozge Tuncel

  1. By: Jean-Louis COMBES (Centre d'Etudes et de Recherches sur le Développement International); Tidiane KINDA (Fonds Monétaire International); Patrick PLANE (Centre d'Etudes et de Recherches sur le Développement International)
    Abstract: This paper analyzes the impact of capital inflows and the exchange rate regime on the real effective exchange rate. A wide range of developing countries (42 countries) is considered with estimation based on panel cointegration techniques. The results show that both public and private inflows cause the real effective exchange rate to appreciate. Among private inflows, portfolio investment has the biggest effect on appreciation, almost seven times that of foreign direct investment or bank loans, and private inflows have the smallest effect. Using a de facto measure of exchange rate flexibility, we find that a more flexible exchange rate helps to dampen appreciation of the real effective exchange rate caused by capital inflows.
    Keywords: Private capital flows, real effective exchange rate, exchange rate flexibility, emerging markets, low-income countries, pooled mean group estimator
    JEL: F32 F31 F21
    Date: 2010
  2. By: Juergen von Hagen (University of Bonn); Haiping zhang (School of Economics, Singapore Management University)
    Abstract: We develop a tractable multi-country overlapping-generations model and show that cross-country differences in financial development explain three recent empirical patterns of international capital flows. Domestic financial frictions in our model distort interest rates and aggregate output in the less financially developed countries. International capital flows help ameliorate the two distortions.International flows of financial capital and foreign direct investment a ect aggregate output in each country directly through affecting the size of aggregate investment. In addition, they affect aggregate output indirectly through affecting the composition of aggregate investment and the size of aggregate savings. Under certain conditions, the indirect effects may dominate the direct effects so that, despite "uphill" net capital flows, full capital mobility may raise the steady-state aggregate output in the poor country as well as raise world output. However, if foreign direct investment is restricted, "uphill" financial capital flows strictly reduce the steady-state aggregate output in the poor countries and it is more likely that the steady-state world output is lower than under international financial autarky.
    Keywords: Capital account liberalization, financial frictions, financial development, foreign direct investment, world output gains
    JEL: E44 F41
    Date: 2010–05
  3. By: Gian-Maria Milesi-Ferretti, Cédric Tille (IUHEID, The Graduate Institute of International and Development Studies, Geneva)
    Abstract: The current crisis saw an unprecedented collapse in international capital flows after years of rising financial globalization. We identify the stylized facts and main drivers of this development. The retrenchment in international capital flows is a highly heterogeneous phenomenon: first across time, being especially dramatic in the wake of the Lehman Brothers’ failure, second across types of flows, with banking flows being the hardest hit due to their sensitivity of risk perception, and third across regions, with emerging economies experiencing a shorter-lived retrenchment than developed economies. Our econometric analysis shows that the magnitude of the retrenchment in capital flows across countries is linked to the extent of international financial integration, its specific nature—with countries relying on bank flows being the hardest hit—as well as domestic macroeconomic conditions and their connection to world trade flows.
    Date: 2010–06–01
  4. By: Ila Patnaik; Abhijit Sen Gupta; Ajay Shah
    Abstract: Traditional explanations for trade misinvoicing -- high custom duties and weak domestic economies — are less persuasive in a world of high growth emerging markets who have low trade barriers. A 35- country data set over a 26 year span, covering both industrialised and developing countries, to study the phenomena of export and import misinvoicing is costructed. Capital account openness, differentials in interest rates, political stability, corruption, indebtedness and the exchange rate regime are identified as factors related to misinvoicing. Trade misinvoicing should be seen as one element of de facto capital account openness. [Working Paper No. 2010-75].
    Keywords: invoicing, custom duties, domestic economies, emerging markets, trade barriers, industrialised, developing countries, capital account, interest rate, political stability, corruption, excahnge rate,
    Date: 2010
  5. By: Marcel Aloy (DEFI - Centre de Recherche en Développement Economique et Finance Internationale - Université de la Méditerranée - Aix-Marseille II); Mohamed Boutahar (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - CNRS : UMR6579); Karine Gente (DEFI - Centre de Recherche en Développement Economique et Finance Internationale - Université de la Méditerranée - Aix-Marseille II); Anne Peguin-Feissolle (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - CNRS : UMR6579)
    Abstract: This paper examines the relationships between the CAC40 index, the Dow Jones index and the Euro/USD exchange rate using daily data over the period 1999-2008. We find that these variables are I(1) nonstationary series, but they are fractionally cointegrated: equilibrium errors exhibit slow mean reversion, responding slowly to shocks. Therefore, with regard to the recent empirical cointegration literature, taking into account fractional cointegration techniques appears as a promising way to study the long-run relationships between stock prices and exchange rates.
    Keywords: fractional cointegration; long memory; stock prices; exchange rates
    Date: 2010
  6. By: Alfred Guender (University of Canterbury); Bevan Cook
    Abstract: The close integration of Australian and New Zealand financial markets and the similarity of the monetary policy regimes provide the perfect backdrop for testing the empirical relevance of uncovered interest rate parity (UIP) in Oceania. We find that changes in the bilateral exchange rate have become more sensitive to the short-term interest differential over time. Most important, after the introduction of the Official Cash Rate regime in New Zealand, the responsiveness of the exchange rate has accelerated to such an extent that it is incompatible with UIP. Evidence on UIP over longer horizons is mixed with a 10-year horizon providing the strongest support for the theory since 1990.
    JEL: F31 F36 E52
    Date: 2010–06–01
  7. By: Ajay Shah; Ila Patnaik
    Abstract: A decomposition in the ownership of shares by foreigners is offered into three parts: the change in insider shareholding, the change in market capitalisation and the change in the fraction of outside shareholding that is held by foreigners. As an example, this decomposition is applied to help understand the sharp change in for- eign ownership of Indian firms after 2001. [Working Paper No. 2010-74].
    Keywords: firms, market capitalisation, ownership, equities, Home bias; foreign investors, shares, foreigners, shareholding, Indian,
    Date: 2010
  8. By: Alberto Martin; Filippo Taddei
    Abstract: The financial crisis of 2007-08 has underscored the importance of adverse selection in financial markets. This friction has been mostly neglected by macroeconomic models of financial frictions, however, which have focused almost exclusively on the effects of limited pledgeability. In this paper, we fill this gap by developing a standard growth model with adverse selection. Our main results are that, by fostering unproductive investment, adverse selection: (i) leads to an increase in the economy’s equilibrium interest rate, and; (ii) it generates a negative wedge between the marginal return to investment and the equilibrium interest rate. Under financial integration, we show how this translates into excessive capital inflows and endogenous cycles. We also explore how these results change when limited pledgeability is added to the model. We conclude that both frictions complement one another and argue that limited pledgeability exacerbates the effects of adverse selection.
    Keywords: Limited Liability, Asymmetric Information, International Capital Flows.
    JEL: D53 D82 E22 F34
    Date: 2010–11
  9. By: Mark J. Holmes (Department of Economics, Waikato University, New Zealand); Jesús Otero (Facultad de Economía, Universidad del Rosario, Colombia); Theodore Panagiotidis (Department of Economics, University of Macedonia, Greece; RCEA, Italy)
    Abstract: The validity of the expectations hypothesis of the term structure is examined for a sample of Asian countries. A panel stationarity testing procedure is employed that addresses both structural breaks and cross-sectional dependence. Asian term structures are found to be stationary and supportive of the expectations hypothesis. Further analysis suggests that international financial integration is associated with interdependencies between domestic and foreign term structures insofar as cross-term structures based on differentials between domestic (foreign) short- and foreign (domestic) long-rates are also stationary.
    Keywords: Correlation, Heterogeneous dynamic panels, term structure, mean reversion, panel stationarity test
    JEL: C33 F31 F33 G15
    Date: 2010–01
  10. By: Paul Alagidede (Department of Economics, University of Stirling, UK); Theodore Panagiotidis (Department of Economics, University of Macedonia, Greece; RCEA, Italy); Xu Zhang (Economic Research Institute, Guosen Research Institute, China)
    Abstract: We employ parametric and non-parametric cointegration to investigate the extent of integration between African stock markets and the rest of the world. Long-run correlation estimates imply very low association between the two. The two distinct cointegration approaches confirm the latter through recursive estimation. The implication is that global market movements may have little impact on Africa. However, we argue that including African assets in a mean variance portfolio could be beneficial to international investors.
    Keywords: Correlation, Long-run correlation, Cointegration, Non-parametric cointegration, African Stock Markets
    JEL: C22 C52 G10
    Date: 2010–01
  11. By: Massimo Guidolin; Federica Ria
    Abstract: Regime switching models have been assuming an increasingly central role in financial applications because of their well-known ability to capture the presence of rich non-linear patterns in the joint distribution of asset returns. After reviewing key concepts and technical issues related to specifying, estimating, and using multivariate Markov switching models in financial applications, in this paper we examine how the presence of regimes in means, variances, and covariances of asset returns translates into explicit dynamics of the Markowitz mean-variance frontier. In particular, we show both theoretically and through an application to international equity portfolio diversification that substantial differences exist between bull and bear regime-specific frontiers, both in statistical and in economic terms. Using Morgan Stanley Capital International (MSCI) investable indices for five countries/macro-regions, we characterize mean-variance frontiers and optimal portfolio strategies in bull periods, in bear periods, and in periods where high uncertainty exists on the nature of the current regime.>
    Keywords: Asset pricing ; Econometric models ; Rate of return ; Great Britain
    Date: 2010
  12. By: Indika Karunanayake (University of Wollongong); Valadkhani, Abbas (University of Wollongong); O'Brien, Martin (University of Wollongong)
    Abstract: This paper examines the interplay between stock market returns and their volatility, focus ingon the Asian and global financial crises of 1997-98 and 2008-09 for Australia, Singapore, the UK, and the US. We use a multivariate generalised autoregressive conditional heteroskedasticity (MGARCH) model and weekly data (January 1992-June 2009). Based on the results obtained from the mean return equations, we could not find any significant impact on returns arising from the Asian crisis and more recent global financial crises across these four markets. However, both crises significantly increased the stock return volatilities across all of the four markets. Not surprisingly, it is also found that the US stock market is the most crucial market impacting on the volatilities of smaller economies such as Australia. Our results provide evidence of own and cross ARCH and GARCH effects among all four markets, suggesting the existence of significant volatility and cross volatility spillovers across all four markets. A high degree of time-varying co-volatility among these markets indicates that it is riskier for investors to diversify their financial portfolio by acquiring stocks withinthese four countries only.
    Keywords: Financial crises, Stock market volatility transmission, Multivariate GARCH model
    JEL: G15
    Date: 2010
  13. By: Rauf Gönenç; Saygin Sahinöz; Ozge Tuncel
    Abstract: Turkey has considerably improved its terms of access to the global capital market. Progress in macroeconomic fundamentals has enhanced credibility and reduced risk premia and capital costs. This has had broad effects on capital supply conditions in the entire economy. Real interest rates have declined, and funds of lengthened maturity are becoming available for a broader range of borrowers and fund users, offering a basis for broader–based long–term growth. Estimations in the paper suggest that reinforcing fiscal institutions, price stability, governance quality, political stability and trade and growth performance would help Turkey to continue to improve its integration with the international capital market and reduce durably its capital costs. This paper relates to the 2010 OECD Economic Review of Turkey (<P>L’Intégration croissante de la Turquie avec le marché global des capitaux : Effets sur les primes de risque et coût du capital<BR>La Turquie a considérablement amélioré ses conditions d'accès au marché global des capitaux. Des progrès dans les fondamentaux macroéconomiques ont renforcé la crédibilité et réduit les primes de risque et le coût du capital. Cela a eu des conséquences considérables sur les conditions de financement de l'économie tout entière. Les taux d'intérêt réels ont diminué, et des fonds à plus longue maturité deviennent disponibles pour un plus large éventail d'utilisateurs de fonds, offrant une base plus large pour la croissance à long terme. Les estimations dans le document suggèrent que le renforcement des institutions budgétaires, de la stabilité des prix, de la qualité de la gouvernance, de la stabilité politique et de la performance du commerce extérieur et de la croissance aiderait la Turquie à continuer à améliorer son intégration avec le marché global des capitaux et à réduire durablement ses coûts en capital. Ce document se rapporte à l’Étude économique de Turquie de l’OCDE, 2010, (
    Keywords: capital markets, risk premia, credit rating, interest rate, economic growth, capital costs, open economy, fiscal institution, croissance économique, marchés de capitaux, taux d'intérêt, prime de risque, coût du capital, économie ouverte, institution budgétaire, notation de crédit
    JEL: E43 E44 E62 F34 F43 G15
    Date: 2010–11–10

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