nep-ifn New Economics Papers
on International Finance
Issue of 2011‒04‒16
eleven papers chosen by
Ajay Shah
National Institute of Public Finance and Policy

  1. The determinants of cross-border bank flows to emerging markets: New empirical evidence on the spread of financial crises By Herrmann, Sabine; Mihaljek, Dubravko
  2. Reassessing the Link between the Japanese Yen and Emerging Asian Currencies By Bong-Han Kim; Hyeongwoo Kim; Hong-Ghi Min
  3. Spillover Effects of the US Financial Crisis on Financial Markets in Emerging Asian Countries By Bong-Han Kim; Hyeongwoo Kim
  4. Financial globalization in emerging economies : much ado about nothing ? By Yeyati, Eduardo Levy; Williams, Tomas
  5. Foreign ownership in Vietnam stock markets - an empirical analysis By Vo, Xuan Vinh
  6. Carry Trade and Momentum in Currency Markets By Craig Burnside; Martin S. Eichenbaum; Sergio Rebelo
  7. Country Portfolios with Imperfect Corporate Governance By Rahul Mukherjee
  8. Financial Development in Emerging Markets: The Indian Experience By Krishnan, K.P.
  9. Asian Monetary Unit and Monetary Cooperation in Asia By Ogawa, Eiji; Shimizu, Junko
  10. Using the global dimension to identify shocks with sign restrictions By Alexander Chudik; Michael Fidora
  11. Chinese reserves accumulation and US monetary policy: Will China go on buying US financial assets? By Luigi Bonatti; Andrea Fracasso

  1. By: Herrmann, Sabine (BOFIT); Mihaljek, Dubravko (BOFIT)
    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. We examine a panel data set of 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. Our empirical framework is based on a gravity model of financial flows. We augment this model with global, lender and borrower country risk factors, as well as financial and monetary integration variables. 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 have been the most important factors behind the decrease in cross-border bank flows during the crisis of 2007–08. The decrease in cross-border loans to 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: C23 F34 F36 O57
    Date: 2011–04–05
  2. By: Bong-Han Kim; Hyeongwoo Kim; Hong-Ghi Min
    Abstract: We reassess the degree of exchange rate co-movement between the Japanese yen and 5 emerging Asian currencies relative to the US dollar in the 2000s. It is often claimed that these currencies have been closely tied with the Japanese yen possibly due to active interactions of Japan and emerging Asian economies. We question the validity of such claims, reporting substantially lower, even negative, dynamic conditional correlations between these currencies and the yen-dollar exchange rate in the second half of the 2000s. Our novel multivariate GARCH framework identifies the liquidity deterioration, measured by the TED spread, and the elevated risk aversion, measured by the sovereign CDS premium, in international capital markets as the two major driving forces of such decoupling phenomena.
    Keywords: Yen-Dollar Exchange Rate; Emerging Asian Currencies; Dynamic Conditional Correlation; DCCX-MGARCH
    JEL: C32 F31 G15
    Date: 2011–04
  3. By: Bong-Han Kim; Hyeongwoo Kim
    Abstract: We estimate dynamic conditional correlations of financial asset returns across countries by an array of multivariate GARCH models and analyze spillover effects of the recent US financial crisis on 5 emerging Asian countries. We find a symptom of financial contagion around the collapse of Lehman Brothers in September 2008. There appears to be a regime shift to substantially higher conditional correlations that persisted for a fairly short-period of time. We also propose a novel approach that allows simultaneous estimations of the conditional correlation coefficient and the effects of its determining factors over time, which can be used to identify channels of spillovers. We find the dominant role of foreign investment for the conditional correlations in international equity markets. The dollar Libor-OIS spread, the sovereign CDS premium, and foreign investment are found to play significant roles in foreign exchange markets.
    Keywords: Financial Crisis; Spillover Effects; Contagion; Emerging Asian Countries; Dynamic Conditional Correlation; DCCX-MGARCH
    JEL: C32 F31 G15
    Date: 2011–04
  4. By: Yeyati, Eduardo Levy; Williams, Tomas
    Abstract: Financial globalization, defined as global linkages through cross-border financial flows, has become increasingly relevant for emerging markets as they integrate financially with the rest of the world. This paper argues that, because of the way it is often measured, it has also led to the misperception that financial globalization in emerging markets has been growing in recent years. The authors characterize the evolution of financial globalization in emerging markets using alternative measures, and find that, in the 2000s, financial globalization has grown only marginally and international portfolio diversification has been limited and declining over time. The paper revisits the empirical literature on the implications of financial globalization for local market deepening, international risk diversification, financial contagion, and financial dollarization, and finds them to be rather limited. Whereas financial globalization has indeed fostered domestic market deepening in good times, it has yielded neither the dividends of consumption smoothing (in line with limited portfolio diversification) nor the costs of amplifying global financial shocks. In turn, financial de-dollarization has largely reflected the undoing of financial offshoring and the valuation effects of real appreciation.
    Keywords: Debt Markets,Emerging Markets,Mutual Funds,Economic Theory&Research,Currencies and Exchange Rates
    Date: 2011–04–01
  5. By: Vo, Xuan Vinh
    Abstract: This paper investigates foreign ownership in the Vietnam stock market from 2007 to 2009 employing a rich and detailed dataset. From the perspective of informational asymmetry, the paper examines the relationship between the foreign ownership level and attributes of Vietnamese listed firm in Ho Chi Minh City Stock Exchange. The findings of the paper indicate that foreign investors have preference for large firms, firms with high book-to-market ratio and firms with low leverage. Foreign investors also avoid firms with dominant shareholders and prefer to invest in firms where they can have influence. The results imply that foreign investors favor to invest in firms where they can avoid informational asymmetry.
    Keywords: foreign ownership; firm attributes; foreign investors; Vietnam
    JEL: G12 G11 G10
    Date: 2010–02–02
  6. By: Craig Burnside; Martin S. Eichenbaum; Sergio Rebelo
    Abstract: We examine the empirical properties of the payoffs to two popular currency speculation strategies: the carry trade and momentum. We review three possible explanations for the apparent profitability of these strategies. The first is that speculators are being compensated for bearing risk. The second is that these strategies are vulnerable to rare disasters or peso problems. The third is that there is price pressure in currency markets.
    JEL: F31
    Date: 2011–04
  7. By: Rahul Mukherjee (IHEID, The Graduate Institute of International and Development Studies, Geneva)
    Abstract: Equity home bias is one of the most enduring puzzles in international finance. In this paper, I start out by documenting a novel stylized fact about home bias: countries with weaker domestic institutions hold fewer foreign assets. I then explore a macroeconomic mechanism by which the presence of agency problems in firms may explain this pattern. To do so, I develop a two-country dynamic stochastic general equilibrium model of international portfolio choice with corporate governance frictions and two distinct agents - outside investors (outsiders) and large controlling shareholders (insiders). Insiders can extract private benefits of control from a firm at a cost which is lower when institutions are weaker. I show that the interaction between the insider's private benefits and investment decisions leads asset and labor income for outsiders to be more negatively correlated in countries with weaker institutions. Thus, outsiders in these countries bias their portfolios more towards home assets to hedge their labor income risk. Calibrating the model to match existing estimates of private benefits of control, I am also able to replicate the cross-country dispersion in insider ownership and investment volatility seen in the data.
    Keywords: home bias, institutional quality, corporate governance
    JEL: F21 F41 G15
    Date: 2011–04–08
  8. By: Krishnan, K.P. (Asian Development Bank Institute)
    Abstract: Financial markets that function well are crucial for the long-run economic growth of a country. This paper, in the first instance, looks at how the financial development of an economy can be measured. It then traces the financial development of India through the 1990s to the present, assessing the development of each segment of financial markets. In doing so, it highlights the dualistic development of the financial sector. Finally, the paper makes an attempt to offer an explanation of this dualistic development and proposes a road map for the future development of financial markets in India.
    Keywords: financial development; india financial development; india financial sector; india financial markets; emerging market economies; india economic growth
    JEL: E44 G18 G28 N25
    Date: 2011–04–08
  9. By: Ogawa, Eiji (Asian Development Bank Institute); Shimizu, Junko (Asian Development Bank Institute)
    Abstract: Regional monetary and financial cooperation in Asia has been discussed for years. To move towards a coordinated exchange rate policy, Ogawa and Shimizu (2005) proposed both an Asian Monetary Unit (AMU), which is a common currency basket computed as a weighted average of the thirteen ASEAN+3 currencies, and AMU Deviation Indicators (AMU DIs), which indicates the deviation of each Asian currency in terms of the AMU compared with the benchmark rate. The AMU and the AMU DIs are considered both as surveillance measures under the Chiang Mai Initiative and as benchmarks for coordinated exchange rate policies among Asian countries. In this paper, the authors show that monitoring the AMU and the AMU DIs plays an important role in the regional surveillance process under the Chiang Mai Initiative. By using daily and monthly data of AMU and AMU DIs for the period from January 2000 to June 2010, which are available from the website of the Research Institute of Economy, Trade, and Industry (RIETI), they examine their usefulness as a surveillance indicator. Our studies of AMU and AMU DIs confirm the following: first, an AMU peg system stabilizes the nominal effective exchange rate (NEER) of each Asian country. Second, the AMU and the AMU DIs could signal overvaluation or undervaluation for each of the Asian currencies. Third, trade imbalances within the region have been growing as the AMU DIs have been widening. Fourth, the AMU DIs could predict huge capital inflows and outflows for each Asian country. The above findings support the usefulness of using the AMU and the AMU DIs as surveillance indicators for monetary cooperation in Asia.
    Keywords: asian monetary unit; asian monetary cooperation; asian financial cooperation; chiang mai initiative; exchange rate policy; common currency basket; asian currencies
    JEL: F31 F33 F36
    Date: 2011–04–05
  10. By: Alexander Chudik (European Central Bank, Kaiserstraße 29, D-60311 Frankfurt am Main, Germany.); Michael Fidora (European Central Bank, Kaiserstraße 29, D-60311 Frankfurt am Main, Germany.)
    Abstract: Identification of structural VARs using sign restrictions has become increasingly popular in the academic literature. This paper (i) argues that identification of shocks can benefit from introducing a global dimension, and (ii) shows that summarising information by the median of the available impulse responses—as commonly done in the literature—has some undesired features that can be avoided by using an alternatively proposed summary measure based on a “scaled median” estimate of the structural impulse response. The paper implements this approach in both a small scale model as originally presented in Uhlig (2005) and a large scale model, introducing the sign restrictions approach to the global VAR (GVAR) literature, that allows to explore the global dimension by adding a large number of sign restrictions. We find that the patterns of impulse responses are qualitatively similar though point estimates tend to be quantitatively much larger in the alternatively proposed approach. In addition, our GVAR application in the context of global oil supply shocks documents that oil supply shocks have a stronger impact on emerging economies’ real output as compared to mature economies, a negative impact on real growth in oil-exporting economies as well, and tend to cause an appreciation (depreciation) of oil-exporters’ (oil-importers’) real exchange rates but also lead to an appreciation of the US dollar. One possible explanation would be the recycling of oil-exporters’ increased revenues in US financial markets. JEL Classification: C32, E17, F37, F41, F47.
    Keywords: Identification of shocks, sign restrictions, VAR, global VAR, oil shocks.
    Date: 2011–04
  11. By: Luigi Bonatti; Andrea Fracasso
    Abstract: It has been argued that China may stop financing the US external deficit, appreciate the currency, increase consumption and move its economy away from tradables and towards nontradables. Our two-country model shows that paradoxically this policy option is unattractive if the US authorities keep monetary policy sufficiently loose, thus reducing the real value of the US liabilities held by China. As long as the American and Chinese authorities pursue complementary objectives, the current China-US arrangement continues. In addition, an untimely appreciation of China’s real exchange rate may have negative consequences on employment in the US and in China.
    Keywords: China-US co-dependency; global imbalances; reserve accumulation; external debt
    JEL: F32 F41
    Date: 2011

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