nep-ifn New Economics Papers
on International Finance
Issue of 2010‒12‒23
six papers chosen by
Ajay Shah
National Institute of Public Finance and Policy

  1. Financial spillovers from the US financial markets to the emerging markets during the subprime crisis: the example of Indian equity markets By Gilles Dufrénot; Benjamin Keddad; Alain Sand-Zantman
  2. A Transaction Data Study of the Forward Bias Puzzle By Francis Breedon; Dagfinn Rime; Paolo Vital
  3. African Leaders: Their Education Abroad and FDI Flows By Constant, Amelie F.; Tien, Bienvenue
  4. International Financial Integration and the External Positions of Euro Area Countries By Philip R. Lane
  5. Financial Integration and Growth -Is Emerging Europe Different? By Christian Friedrich; Isabel Schnabel; Jeromin Zettelmeyer
  6. Complex Vertical FDI and Firm Heterogeneity: Evidence from East Asia By Kazunobu Hayakawa; Toshiyuki Matsuura

  1. By: Gilles Dufrénot (Université d’Aix Marseille II, DEFI.); Benjamin Keddad (Université d’Aix Marseille II, DEFI.); Alain Sand-Zantman (Observatoire Français des Conjonctures Économiques)
    Abstract: This paper provides evidence of spillover effects from the Indian to the US financial markets. We use VAR and Kalman filter analysis to assess the influence of financial stress indicators like the LIBOR-OIS, CDS, the S&P 500 volatility and the exchange rate of the rupee against the Dollar on two indicators of financial stress in India, namely the illiquidity of stock indices and their volatility. We conduct an analysis bases on both daily and monthly frequency and use a database that consists of both aggregate and disaggregated indexes. Our results points to a signification contagion effect after the period following the Lehman Brothers collapse.
    Keywords: Subprime crisis, Emerging Markets, VAR analysis, financial stress
    JEL: F37 G15 O53
    Date: 2010–11
  2. By: Francis Breedon (Queen Mary, University of London); Dagfinn Rime (Norges Bank (Central Bank of Norway)); Paolo Vital (University d'Annunzio)
    Abstract: Using ten years of FX transactions data we demonstrate that a large share of the FX forward discount bias can be accounted for by order flow. A simple microstructure-based decomposition suggests that order flow creates a timevarying risk premium that is correlated with the forward discount. The order flow related risk premium is particularly important in currency pairs traditionally associated with carry trade activity, as for these crosses it accounts for more than half of the forward bias (with the rest accounted for by systematic forecasting errors). We also find evidence that order flow is partly driven by carry trade activity, which is itself is driven by expectations of carry trade profits. However, carry trading increases currency-crash risk in that the carry-induced order flow generates negative skewness in FX returns.
    Keywords: Forward Discount Puzzle, FX Microstructure, Carry Trade, Survey Data
    JEL: F31 G14 G15
    Date: 2010–12–13
  3. By: Constant, Amelie F. (DIW DC, George Washington University); Tien, Bienvenue (DIW DC)
    Abstract: Leaders are critical to a country’s success. They can influence domestic policy via specific measures that they enforce, and they can also influence international public opinion towards their country. Foreign Direct Investments are also essential for a country’s economic growth. Our hypothesis is that foreign-educated leaders attract more FDI to their country. Our rationale is that education obtained abroad encompasses a whole slew of factors that can make a difference in FDI flows when this foreign-educated individual becomes a leader. We test this hypothesis empirically with a unique dataset that we constructed from several sources, including the Library of Congress and the World Bank. Our analysis of 40 African countries employs the robust technique of conditional quantile regression. Our results reveal that foreign education is a significant determinant of FDI inflows, beyond other standard characteristics. While intuitive, this result does not necessarily indicate sheepskin effects or superior human capital obtained abroad. Rather, it indicates the powerful role of the social capital, networks, and connections that these leaders built while they were abroad that they in turn mobilize and utilize when they become leaders.
    Keywords: FDI, leaders' educational level, return migration, Africa
    JEL: C31 C33 F21 I21
    Date: 2010–12
  4. By: Philip R. Lane
    Abstract: This paper describes the dynamics of the external positions of euro area countries since the formation of EMU. While external imbalances have been the main focus in recent times, current account balances can only be properly interpreted in the context of understanding the overall international balance sheet and the dynamics of the net foreign asset. The creation of the euro represented a fundamental financial shock, whose effects then coincided with a reshaping of the international financial system through important financial innovations and the credit boom and securitization boom that followed. The paper builds a profile of the international balance sheets of euro area countries in order to understand the sources and implications of shifts in net positions over the last decade. It is also considers the gross scale of cross-border holdings. To understand the international risk distribution, the overall position is broken down between equity and debt components. The international currency exposures embedded in the international balance sheets are described. In relation to net flows and net positions, the paper tracks the distribution and persistence of current account balances and net foreign asset positions across the member countries. Furthermore, we document that other factors (such as valuation effects) have been important in the dynamics of the net foreign asset positions, in addition to the contribution made by the cumulative current account position. This working paper relates to the 2010 OECD Economic Survey of the Euro Area (<P>L’intégration financière mondiale et les positions extérieures des pays de la zone euro<BR>Ce document décrit la dynamique des positions extérieures des pays de la zone euro depuis la formation de l’Union économique et monétaire. Alors que les déséquilibres externes ont été au centre des intérêts ces derniers temps, l’interprétation des soldes des opérations courantes ne peut se faire qu’à la lumière de la situation financière mondiale et de la dynamique des actifs nets extérieurs. La création de l’euro a représenté un choc financier fondamental, dont les effets ont alors coïncidé avec une réorganisation du système financier international à travers d’importantes innovations financières ainsi que de l’explosion du crédit et de l’envolée de la titrisation qui s’en ont suivies. Ce document établit un profil de la situation financière globale des pays de la zone euro afin de comprendre les origines et implications des positions nettes au cours de la dernière décennie. Il étudie également la forte ampleur des avoirs transnationaux. Pour comprendre la répartition internationale des risques, la situation globale est décomposée en avoirs et dettes. Les risques de change intégrés dans les bilans globaux y sont décrits. Le document retrace la répartition et la persistance des soldes courants et des positions nettes extérieures dans les différents pays membres, en lien avec les flux et positions nets. Par ailleurs, on montre qu’outre l’apport fourni par le cumul des soldes de la balance courante, les autres facteurs (tels que les effets de valorisation) ont été importants dans la dynamique des positions nettes extérieures. Ce document de travail se rapporte à l'Étude économique de la zone euro. (
    Keywords: capital flows, euro area, international investment position, currency exposures, flux de capitaux, zone Euro, position d’investissements internationaux, risque de change
    JEL: F21 F32 F34 F36
    Date: 2010–12–10
  5. By: Christian Friedrich (Graduate Institute for International and Development Studies, Geneva, Switzerland); Isabel Schnabel (Chair of Financial Economics, Johannes Gutenberg-UniversitŠt Mainz, Germany); Jeromin Zettelmeyer (European Bank for Reconstruction and Development, London, UK)
    Abstract: Using industry-level data, this paper shows that the European transition region benefited much more strongly from financial integration in terms of economic growth than other developing countries in the years preceding the current crisis. We analyze several factors that may explain this finding: financial development, institutional quality, trade integration, political integration, and financial integration itself. The explanation that stands out is political integration. Within the group of transition countries, the effect of financial integration is strongest for countries that are politically closest to the EU. This suggests that political and financial integration are complementary and that political integration can considerably increase the benefits of financial integration.
    Keywords: Financial integration; political integration; economic growth; parent banking; European transition economies
    JEL: E43 E52 E58 D44
    Date: 2010–11–17
  6. By: Kazunobu Hayakawa (Inter-disciplinary Studies Center, Institute of Developing Economies); Toshiyuki Matsuura (Institute of Economic and Industrial Studies, Keio University)
    Abstract: In this study, we statistically test the validity of the mechanics of complex vertical foreign direct investment (VFDI) in Japanese machinery FDI to East Asia by estimating a multiple-spatial lag model. From the theoretical viewpoint, in complex VFDI, the production activity of affiliates in a given country is positively related to that in neighboring countries that have large differences in factor prices with the given country. Our empirical results show that such mechanics of complex VFDI work in Japanese FDI to East Asia, and that they work more strongly in those MNEs with higher productivity. These results have important implications on the policies of developing countries in attracting FDI.

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