nep-ifn New Economics Papers
on International Finance
Issue of 2011‒05‒14
thirteen papers chosen by
Ajay Shah
National Institute of Public Finance and Policy

  1. Why a diversified portfolio should include African assets By Alagidede, Paul; Panagiotidis, Theodore; Zhang, Xu
  2. International Mutual Funds, Capital Flow Volatility, and Contagion-A Survey By Gaston Gelos
  3. The threat of 'currency wars': a European perspective By Zsolt Darvas; Jean Pisani-Ferry
  4. Currency Wars: What do effective exchange rates tell us? By Jean Pisani-Ferry
  5. A network analysis of global banking:1978-2009 By Camelia Minoiu; Javier A. Reyes
  6. Growth from International Capital Flows: The Role of Volatility Regimes By Ashoka Mody; Antu Panini Murshid
  7. What international monetary system for a fast-changing world economy By Agnès Bénassy-Quéré; Jean Pisani-Ferry
  8. A new model-based approach to measuring time-varying financial market integration By T. BERGER; L. POZZI
  9. Financial Constraints and Foreign Market Entries or Exits: Firm-Level Evidence from France By Askenazy, Ph.; Caldera, A.; Gaulier, G.; Irac, D.
  10. Reform of the international monetary system: Some concrete steps By Yongding Yu; Agnès Bénassy-Quéré; Jean Pisani-Ferry
  11. Sovereign Rating News and Financial Markets Spillovers: Evidence from the European Debt Crisis By Rabah Arezki; Bertrand Candelon; Amadou N. R. Sy
  12. Spread Components in the Hungarian Forint-Euro Market By M. FRÖMMEL; F. VAN GYSEGEM
  13. Not all financial regulation is global By Nicolas Véron

  1. By: Alagidede, Paul; Panagiotidis, Theodore; Zhang, Xu
    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: African Stock Markets; Non-parametric cointegration; Cointegration; Long-run correlation; Correlation
    Date: 2010–11
  2. By: Gaston Gelos
    Abstract: Gaining a better understanding of the behavior of international investors is key for informing the debate about the optimal response to capital flows and about reforms to the international financial architecture. In this context, recent research on the behavior of international mutual funds at the micro level has expanded our knowledge about the drivers of portfolio flows and the mechanisms behind the transmission of financial shocks across countries. This paper provides a brief survey of this literature, with a focus on the empirical evidence for emerging markets. Overall, the behavior of international mutual funds is complex and overly simplistic characterizations are misleading. However, there is broad-based evidence for momentum trading among funds. Moreover, funds tend to avoid opaque markets and assets, and this behavior becomes more pronounced during volatile times. Portfolio rebalancing mechanisms are clearly important in explaining contagion patterns, even in the absence of common macroeconomic fundamentals. From a surveillance point of view, this implies that monitoring the exposures of large investors at a micro level is crucial to assess vulnerabilities.
    Keywords: Asset management , Bond markets , Capital flows , Emerging markets , Financial instruments , Financial risk , International capital markets , Investment , Transparency ,
    Date: 2011–04–27
  3. By: Zsolt Darvas; Jean Pisani-Ferry
    Abstract: This Policy Contribution was prepared as a briefing paper for the European Parliament Economic and Monetary Affairs CommitteeÂ?s Monetary Dialogue, entitled Â?The threat of Â?currency warsÂ?: global imbalances and their effect on currencies,Â? held on 30 November 2010. Bruegel Fellows Jean Pisani-Ferry and Zsolt Darvas argue the so-called Â?currency warÂ? is manifested in three ways: 1) the inflexible pegs of undervalued currencies; 2) attempts by floating exchange-rate countries to resist currency appreciation; 3) quantitative easing. Europe should primarily be concerned about the first issue, which relates to the renewed debate about the international monetary system. The attempts of floating exchange-rate countries to resist currency appreciation are generally justified while China retains a peg. Quantitative easing cannot be deemed a Â?beggar-thy-neighbourÂ? policy as long as the FedÂ?s policy is geared towards price stability. Central banks should come to an agreement about the definition of price stability at a time of deflationary pressures, as current US inflationary expectations are at historically low levels. Finally, the exchange rate of the Euro has not been greatly impacted by the recent currency war; the euro continues to be overvalued, but less than before.
    Date: 2010–12
  4. By: Jean Pisani-Ferry
    Abstract: In November, South Korea joined the ranks of countries striving to limit the upwards pressure on their currency when two lawmakers submitted a parliamentary proposal to impose various taxes on foreign capital inflows and outflows. If any of these measures pushes through, South Korea would become the first (traditionally financially liberalised) OECD country to reinstate capital controls. This brings the list of countries intervening directly, indirectly or considering intervention to more than 23. This is an unwelcome and disturbing, but hardly surprising, development: as policy rates in the US are at near-zero levels and monetary policy is geared towards managing the yield curve in order to meet domestic objectives, emerging countries throughout the world are scrambling to protect themselves from the negative spillovers in the form of massive capital inflows...
    Date: 2010–11
  5. By: Camelia Minoiu; Javier A. Reyes
    Abstract: In this paper we explore the properties of the global banking network using cross-border bank lending data for 184 countries over 1978-2009. Specifically, we analyze financial interconnectedness using network metrics of centrality, connectivity, and clustering. We document a relatively unstable global banking network, with structural breaks in network indicators identifying several waves of capital flows. Interconnectedness rankings, especially for borrowers, are relatively volatile over the period. Connectivity tends to fall during and after systemic banking crises and sovereign debt crises. The 2008-09 global financial crisis stands out as an unusually large perturbation to the cross-border banking network.
    Keywords: Banking crisis , Capital flows , Cross country analysis , Emerging markets , Financial crisis , International banking , Loans ,
    Date: 2011–04–04
  6. By: Ashoka Mody; Antu Panini Murshid
    Abstract: Recent commentary has downplayed the growth dividend from international financial integration, highlighting the possibly negative correlation between capital inflows and long-run growth. This paper presents new evidence consistent with standard economic theory and a more benign interpretation of cross-border private capital flows. The key observation is that a country’s growth volatility changes over time. With volatility below a threshold, an inflow of foreign capital has promoted growth. However, during periods of volatile growth, more flows have been associated with slower growth. Volatility levels and changes reflect an interaction of domestic production and institutional structures with global factors.
    Keywords: Capital flows , Capital inflows , Current account surpluses , Developing countries , Development assistance , Economic growth , Economic models , Foreign investment ,
    Date: 2011–04–27
  7. By: Agnès Bénassy-Quéré; Jean Pisani-Ferry
    Abstract: Though the renminbi is not yet convertible, the international monetary regime has already started to move towards a 'multipolar' system, with the dollar, the euro and the renminbi as its key likely pillars. This shift corresponds to the long-term evolution of the balance of economic weight in the world economy. Such an evolution may mitigate some of the flaws of the present (non-) system, such as the rigidity of key exchange rates, the asymmetry of balance of-payments adjustments or what remains of the Triffin dilemma. However it may exacerbate other problems, such as short-run exchange rate volatility or the scope for â??currency warsâ??, while leaving key questions unresolved, such as the response to capital flows global liquidity provision. Hence, in itself, a multipolar regime can be both the best and the worst of all regimes.Which of these alternatives will materialise depends on the degree of cooperation within a multilateral framework.
    Date: 2011–04
  8. By: T. BERGER; L. POZZI
    Abstract: We investigate financial market integration by looking at the stock market linkages of five developed countries (France, Germany, Japan, the UK, and the US) over the period 1970:1- 2010:8. We measure the time-varying degree of world stock market integration of each country through the conditional variance of the country-specific premium in equity excess returns. The country-specific premiums are derived theoretically from an international CAPM with market imperfections. They are estimated from the latent factor decomposition implied by the theory through the use of state space methods that allow for GARCH errors. Our empirical results suggest that stock market integration has increased over the period 1970:1-2010:8 in all countries but Japan. And while there is a structural increase in stock market integration in four out of five countries, all countries also exhibit several shorter periods of disintegration (reversals), i.e. periods in which country-specific shocks play a more dominant role. Hence, stock market integration is measured as a dynamic process that is fluctuating in the short run while gradually increasing in the long run.
    Keywords: financial markets, integration, factor model, unobserved component, GARCH
    JEL: G15 C32
    Date: 2011–04
  9. By: Askenazy, Ph.; Caldera, A.; Gaulier, G.; Irac, D.
    Abstract: This paper studies the effect of credit constraints on the expansion and survival of firms in foreign markets. It develops a model in which, lower access to external finance, or reduced internal liquidity, hampers the firm ability to finance the recurrent costs to serve foreign markets and decreases firm survival in foreign markets. Additionally, financial constraints act as a barrier to firm export expansion by decreasing the firm ability to finance the entry costs into new export markets; thus, they push firm to avoid losing destinations. We use a unique longitudinal dataset on French firms that contains information on export destinations of individual firms and allows us to construct various firm-level measures of financial constraints to test these predictions. We obtain two main results. First, credit constraints have a negative effect on the number of newly served destinations. Second, higher probability of exit from the export market is also associated with credit constraints; that is consistent with constraints limiting the financing of recurrent export costs.
    Keywords: Firm heterogeneity, financial constraints, trade.
    JEL: D24 F14 D92
    Date: 2011
  10. By: Yongding Yu; Agnès Bénassy-Quéré; Jean Pisani-Ferry
    Abstract: Reform of the international monetary system is under discussion after three decades of apathy. Tectonic shifts in the balance of international power have made reform more urgent. However, in the short term, there is little chance of a grand redesign of the international monetary system. Nevertheless, concrete steps should be taken. First, consensus is needed on exchange rates, capital flows and reserves. Second, financial safety nets must be improved so that countries do not have to self-insure by accumulating  reserves or rely on possible bilateral swap lines to access liquidity. Third, a change in the composition of the Special Drawing Right should be planned for, to strengthen the multilateral framework. The most workable short-term deliverables seem to be (i) guidelines on and surveillance of capital controls; (ii) a new regime for deciding on SDR allocations that would facilitate more frequent use of this instrument; and (iii) the inclusion of the renmimbi in the SDR basket. These reforms would be a partial move, preparing the ground for further developments.
    Date: 2011–03
  11. By: Rabah Arezki; Bertrand Candelon; Amadou N. R. Sy
    Abstract: This paper examines the spillover effects of sovereign rating news on European financial markets during the period 2007-2010. Our main finding is that sovereign rating downgrades have statistically and economically significant spillover effects both across countries and financial markets. The sign and magnitude of the spillover effects depend both on the type of announcements, the source country experiencing the downgrade and the rating agency from which the announcements originates. However, we also find evidence that downgrades to near speculative grade ratings for relatively large economies such as Greece have a systematic spillover effects across Euro zone countries. Rating-based triggers used in banking regulation, CDS contracts, and investment mandates may help explain these results.
    Keywords: Announcements , Bonds , Capital markets , Credit , Cross country analysis , Eastern Europe , Financial crisis , Public information notices , Sovereign debt , Spillovers , Press Releases ,
    Date: 2011–03–29
    Abstract: We apply the spread decomposition model by Huang and Stoll (1997) to a new dataset on the Hungarian Forint/Euro interbank market. In contrast to previous results we cover a minor market over a long time span. We find a significant inventory effect, which can be explained by the low number of trades per day and thus the long time between offsetting trades. The trading volume increased gradually during our sample period and coincided with a decreasing spread. We find that spread size increases significantly with trade size, in contrast to previous research on the customer market. We show that this increase is caused by rising inventory holding and adverse selection costs. Overall this work confirms the predictions from various theoretical models on a small and less liquid market. When comparing with other results the size of the market, institutional differences between markets and specificities of a dataset seem to play an important role.
    Keywords: microstructure, foreign exchange, spread, Hungary, inventory, adverse selection
    JEL: F31 G15
    Date: 2011–02
  13. By: Nicolas Véron
    Abstract: Financial regulation at global level has been high on the G20 agenda. However, financial multipolarity, with the rise of emerging economies, and its impact on decision-making at global level has made global convergence difficult. In this policy brief, the authors, Bruegel Senior Fellow Nicolas Véron and Stéphane Rottier, National Bank of Belgium, explain why now is the time to focus on building stronger global public institutions, ensuring globally consistent financial information, creating globally integrated capital-markets infrastructure and addressing competitive distortions among global capital-market intermediaries to set the foundation for global harmonisation of all aspects of financial regulation.
    Date: 2010–08

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