nep-ifn New Economics Papers
on International Finance
Issue of 2011‒01‒03
fifteen papers chosen by
Ajay Shah
National Institute of Public Finance and Policy

  1. Composition of International Capital Flows: A Survey By Koralai Kirabaeva; Assaf Razin
  2. Carry Trade with Maintained Currencies - A Risk and Return Analysis for the Egyptian Pound By Christian Kalhoefer; Sara Shenouda; Ahmed Badawi
  3. Export versus FDI in services By Ila Patnaik; Ajay Shah; Rudrani Bhattacharya
  4. Exchange Rate and Industrial Commodity Volatility Transmissions, Asymmetries and Hedging Strategies By Shawkat M. Hammoudeh; Yuan Yuan; Michael McAleer
  5. Bank Competition and International Financial Integration: Evidence Using a New Index By Gurnain Kaur Pasricha
  6. Non-Stationary Interest Rate Differentials and the Role of Monetary Policy By Matros, Philipp; Weber, Enzo
  7. African Leaders: Their Education Abroad and FDI Flows By Amelie Constant; Bienvenue N. Tien
  8. The role of home and host country characteristics in FDI: firm-level evidence from Japan, Korea and Taiwan By Hayakawa, Kazunobu; Lee, Hyun-Hoon; Park, Donghyun
  9. Determinants of Emerging Market Sovereign Bond Spreads: Fundamentals vs Financial Stress By Iva Petrova; Michael G Papaioannou; Dimitri Bellas
  10. Did adhering to the gold standard reduce the cost of capital? By Ron Alquist; Ben Chabot
  11. Exchange Rate Market Expectations and Central Bank Policy: The case of the Mexican Peso-US Dollar from 2005-2009 By Gustavo Abarca; José Gonzalo Rangel; Guillermo Benavides
  12. Why are U.S. firms listed in foreign markets worth more? By Sarkissian, Sergei; Schill, Michael
  13. Cross listing waves By Sarkissian, Sergei; Schill, Michael
  14. Flight to Liquidity and Global Equity Returns By Goyenko, Ruslan; Sarkissian, Sergei
  15. Foreign bank lending and information asymmetries in China By Pessarossi, Pierre; Godlewski, Christophe J.; Weill, Laurent

  1. By: Koralai Kirabaeva; Assaf Razin
    Abstract: We survey several key mechanisms that explain the composition of international capital flows: foreign direct investment, foreign portfolio investment and debt flows (bank loans and bonds). In particular, we focus on the following market frictions: asymmetric information in capital markets and exposure to liquidity shocks. We show that the information asymmetry between foreign and domestic investors leads to inefficient investment allocation and borrowing in a country that finances its domestic investment through foreign debt or foreign equity. Exposure to liquidity shocks due to the mismatch of debt maturity may induce banking crises and cause sudden reversals of short-term capital flows. When there is asymmetric information between sellers and buyers in the capital market, then due to the adverse selection foreign direct investment is associated with higher liquidation costs than portfolio investment. The difference in exposure to liquidity shocks (in addition to asymmetric information) can explain the composition of equity flows between developed and emerging countries, and the patterns of foreign direct investments during financial crises.
    Keywords: International topics
    JEL: F21 F34 D82
    Date: 2010
  2. By: Christian Kalhoefer (Faculty of Management Technology, The German University in Cairo); Sara Shenouda (Faculty of Management Technology, The German University in Cairo); Ahmed Badawi (Faculty of Management Technology, The German University in Cairo)
    Abstract: The forward premium puzzle in the exchange rate market, resulting from the deviation and failure of interest rate parity, has awakened the interest of speculators to perform carry trade activities. Across literature the main risk associated and measured for carry trade has been the exchange rate risk and crash risk related to the relevant currencies used. But within the literature, the influence of maintained currencies on the carry trade results has not yet been covered. This paper analyzes the potential performance and the risk of carry trade strategies within a maintained exchange rate regime. For this analysis an empirical study of carry trade strategies applied between the EGP and other currencies has been used and compared to those with the USD as an example for a maintained exchange rate. Our risk and return analysis clearly shows a combination of high return and low risk for the maintained currency carry trade.
    Keywords: Carry Trade Performance, Uncovered Interest Parity, Maintained Exchange Rates, Value at Risk
    JEL: F31 G15
    Date: 2010–12
  3. By: Ila Patnaik; Ajay Shah; Rudrani Bhattacharya
    Abstract: In the literature on exports and investment, most productive firms are seen to invest abroad. In the Helpman et al. (2004) model, costs of transportation play a critical role in the decision about whether to serve foreign customers by exporting, or by producing abroad. We consider the case of tradable services, where the marginal cost of transport is near zero. We argue that in the purchase of services, buyers face uncertainty about product quality, especially when production is located far away. Firm optimisation then leads less productive firms to self-select themselves for FDI. We test this prediction with data from the Indian software industry and find support for it.
    Keywords: Economic models , Exports , Foreign investment , India , Productivity , Services sector , Software ,
    Date: 2010–12–13
  4. By: Shawkat M. Hammoudeh (Lebow College of Business, Drexel University); Yuan Yuan (Lebow College of Business, Drexel University); Michael McAleer (Erasmus University Rotterdam, Tinbergen Institute, The Netherlands, and Institute of Economic Research, Kyoto University)
    Abstract: This paper examines volatility, volatility spillovers, optimal portfolio weights and hedging for systems that include the dollar/euro exchange rate together with four important and highly traded commodities - aluminum, copper, gold and oil - by utilizing four 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. The model that includes copper displays more direct and indirect transmissions than the one that includes aluminum which displays the high interactions with oil. Optimal portfolio weights suggest that investors should hold more of aluminum, copper and gold and less of oil in those portfolios. Hedging ratios indicate that the most effective way of hedging long commodity and euro positions is shorting them with oil positions.
    Keywords: MGARCH; shocks; volatility; transmission; asymmetries; hedging
    JEL: C51 E27 Q43
    Date: 2010–12
  5. By: Gurnain Kaur Pasricha
    Abstract: This paper finds a strong empirical link between domestic banking sector competitiveness and de facto international integration. De-facto international integration is measured through a new index of financial integration, which measures, for deviations from covered interest parity, the size of no-arbitrage bands and the speed of arbitrage outside the no-arbitrage band. The strong empirical link between de-facto integration and domestic financial sector competitiveness allows us to reinterpret the recent literature on the benefits and costs of international financial integration. This literature has emphasized the development of domestic markets as a precondition to benefiting from international integration. This paper offers an alternative view. Lack of competition in domestic financial systems may prevent countries from reaping the benefits of international integration simply because it prevents them from being integrated in a meaningful way – that of price equalization. This finding suggests that financial sector consolidation of the type recently witnessed in the crisis environment may have negative consequences for countries' de-facto international financial integration. Another important result of the paper is that the level of de-jure controls have a limited association with de-facto integration, particularly for developing economies.
    Keywords: Econometric and statistical methods; Financial markets; International topics
    JEL: F32 G15 G21
    Date: 2010
  6. By: Matros, Philipp; Weber, Enzo
    Abstract: The present work deals with a frequently detected failure of the uncovered interest rate parity (UIP) - the absence of bivariate cointegration between domestic and foreign interest rates. We explain non-stationarity of the interest differential via central bank reactions to exchange rate variations. Thereby, the exchange rate in levels introduces an additional stochastic trend into the system. Trivariate cointegration between the interest rates and the exchange rate accounts for the missing stationarity property of the interest differential. We apply the concept to the case of Turkey and Europe, where we can validate the theoretical considerations by multivariate time series techniques.
    Keywords: Uncovered Interest Rate Parity; Monetary Policy Rules; Cointegration; Vector-Error Correction Model
    JEL: E44 F31 C32
    Date: 2010–12–21
  7. By: Amelie Constant; Bienvenue N. Tien
    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
  8. By: Hayakawa, Kazunobu; Lee, Hyun-Hoon; Park, Donghyun
    Abstract: There is a large and growing empirical literature that investigates the determinants of outward foreign direct investment (FDI). This literature examines primarily the effect of host country characteristics on FDI even though home country characteristics also influence the decision of firms to invest abroad. In this paper, we examine the role of both host and home country characteristics in FDI. To do so, we constructed a firm-level database of outward FDI from Japan, Korea, and Taiwan. Our empirical analysis yields two main findings. First, host countries with better environment for FDI, in terms of larger market size, smaller fixed entry costs, and lower wages, attract more foreign investors. Second, firms from home countries with higher wages are more likely to invest abroad. An interesting and significant policy implication of our empirical evidence is that policymakers seeking to promote FDI inflows should prioritize countries with higher wages.
    Keywords: FDI, Multinational firm, Firm heterogeneity, Foreign investments, International business enterprises, Industrial management, Productivity
    JEL: D24 F21 F23
    Date: 2010–12
  9. By: Iva Petrova; Michael G Papaioannou; Dimitri Bellas
    Abstract: This paper analyses the determimants of emerging market sovereign bond spreads by examining the short and long-run effects of fundamental (macroeconomic) and temporary (financial market) factors on these spreads. During the current global financial and economic crisis, sovereign bond spreads widened dramatically for both developed and emerging market economies. This deterioration has widely been attributed to rapidly growing public debts and balance sheet risks. Our results indicate that in the long run, fundamentals are significant determinants of emerging market sovereign bond spreads, while in the short run, financial volatility is a more important determinant of sperads than fundamentals indicators.
    Keywords: Bonds , Economic models , Emerging markets , External borrowing , External debt , Financial crisis , Financial risk , Sovereign debt ,
    Date: 2010–12–07
  10. By: Ron Alquist; Ben Chabot
    Abstract: A commonly cited benefit of the pre-World War One gold standard is that it reduced the cost of international borrowing by signaling a country’s commitment to financial probity. Using a newly constructed data set that consists of more than 55,000 monthly sovereign bond returns, we test if gold-standard adherence was negatively correlated with the cost of capital. Conditional on UK risk factors, we find no evidence that the bonds issued by countries off gold earned systematically higher excess returns than the bonds issued by countries on gold. Our results are robust to allowing betas to differ across bonds issued by countries off- and on-gold; to including proxies that capture the effect of fiscal, monetary, and trade shocks on the commitment to gold; and to controlling for the effect of membership in the British Empire.
    Keywords: Gold standard ; Bonds
    Date: 2010
  11. By: Gustavo Abarca; José Gonzalo Rangel; Guillermo Benavides
    Abstract: We examine two approaches characterized by different tail features to extract market expectations on the Mexican peso-US dollar exchange rate. Expectations are gauged by risk-neutral densities. The methods used to estimate these densities are the Volatility Function Technique (VFT) and the Generalized Extreme Value (GEV) approach. We compare these methods in the context of monetary policy announcements in Mexico and the US. Once the surprise component of the announcements is considered, our results indicate that, although both VFT and GEV suggest similar dynamics at the center of the distribution, these two methods show significantly different patterns in the tails. Our empirical evidence shows that the GEV model captures better the extreme values.
    Keywords: Exchange rates, monetary policy, risk-neutral densities
    JEL: C14 E44 E58 F31
    Date: 2010–12
  12. By: Sarkissian, Sergei; Schill, Michael
    Abstract: An expanding literature asserts that non-U.S. firms achieve a value premium for listing on U.S. equity markets. In this paper we examine the foreign listing premium across a global sample of home and host markets, including U.S. firms that list on non-U.S. stock exchanges. We find that the value premium of U.S. firms that list abroad is similar to that of non-U.S. firms that list on U.S. exchanges, and that many other home and host markets manifest a foreign listing premium. The cross-sectional variation in the value premium appears to have little association with any unique institutional feature of the market; rather it is related to variation in pre-listing valuation ratios. We establish that the foreign listing premium disappears once we control for the firm’s pre-listing valuation ratio.
    Keywords: Cross listings; Firm valuation; Rule of law; Stock exchanges; Tobin’s Q
    JEL: G15 G32
    Date: 2010
  13. By: Sarkissian, Sergei; Schill, Michael
    Abstract: Using a 57-year global panel of listings on foreign stock exchanges, we identify waves in foreign listing activity at the host market, home market, and industry levels. We observe that the waves in the host market are often due to cross-listing waves in home markets or industries that share a particular affiliation with the respective host market. We then find that cross-listing waves in a given host country or from a given home country largely coincide with the outperformance of that country’s economy and financial markets relative to other competing markets. We also show that firms that list their shares during waves are associated with a temporary value premium. Our results provide novel evidence of non-monotonic market development across countries and over time.
    Keywords: Firm valuation; Market competitiveness; Market timing; Stock exchanges
    JEL: G15 G32
    Date: 2010
  14. By: Goyenko, Ruslan; Sarkissian, Sergei
    Abstract: Investment practice and academic literature suggest a great degree of interaction between the world’s stock markets and most liquid and safe assets, such as U.S. Treasuries. Using data from 46 markets and a 30-year time period, we examine the impact of “flight-to-liquidity” events on global asset valuation. This wide cross-sectional and time-series sample provides a natural setting for analyzing the link between changes in the illiquidity of Treasuries and expected equity returns. Our illiquidity measure is the average percentage bid-ask spread of off-the-run U.S. Treasury bills with maturities of up to one year. We find that this proxy predicts stock market illiquidity and future equity returns in both developed and emerging markets. This predictive relation remains intact after controlling for various world and country-level variables. Asset pricing tests further reveal that Treasury bond illiquidity is a significantly priced factor even in the presence of other conventional risks, such as those of the world stock market, foreign exchange, local equity market variance and illiquidity, as well as the term spread. Our results indicate that flight-to-liquidity risk is an important determinant of returns in global equity markets.
    Keywords: Cross-asset integration; Flight-to-quality; Illiquidity beta; International asset pricing; Monetary policy
    JEL: G12 G15
    Date: 2010
  15. By: Pessarossi, Pierre (BOFIT); Godlewski, Christophe J. (BOFIT); Weill, Laurent (BOFIT)
    Abstract: This paper considers whether information asymmetries affect the willingness of foreign banks to participate in syndicated loans to corporate borrowers in China. In line with theoretical literature, ownership concentration of the borrowing firm is assumed to influence information asymmetries in the relationship between the borrower and the lender. We analyze how ownership concentration influences the participation of foreign banks in a loan syndicate using a sample of syndicated loans granted to Chinese borrowers in the period 2004-2009 for which we have information on ownership concentration. We observe that greater ownership concentration of the borrowing firm does not positively influence participation of foreign banks in the loan syndicate. Additional estimations using alternative specifications provide similar results. As foreign banks do not react positively to ownership concentration, we conclude that information asymmetries are not exacerbated for foreign banks relative to local banks in China. Moreover, it appears that increased financial leverage discourages foreign bank participation, suggesting that domestic banks are less cautious in their risk management.
    Keywords: bank; foreign investors; information asymmetry; loan; syndication; China
    JEL: G21 P34
    Date: 2010–12–30

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