nep-ifn New Economics Papers
on International Finance
Issue of 2011‒06‒25
twelve papers chosen by
Ajay Shah
National Institute of Public Finance and Policy

  1. Exchange rate anchoring - Is there still a de facto US dollar standard? By Thierry Bracke; Irina Bunda
  2. Financial Integration in Emerging Asia: Challenges and Prospects By Park, Cyn-Young; Lee, Jong-Wha
  3. Global Crises and Equity Market Contagion By Geert Bekaert; Michael Ehrmann; Marcel Fratzscher; Arnaud J. Mehl
  4. Surviving the Global Financial Crisis: Foreign Ownership and Establishment Performance By Laura Alfaro; Maggie Chen
  5. Contagion effect of financial crisis on OECD stock markets By Kazi, Irfan Akbar; Guesmi, Khaled; Kaabia, Olfa
  6. Actually This Time Is Different By Renée Fry; Cody Yu-Ling Hsiao; Chrismin Tang
  7. International Taxation and Cross-Border Banking By Huizinga, H.P.; Voget, J.; Wagner, W.B.
  8. Equity Home Bias Among Czech Investors: Experimental Approach By Karel Báa
  9. Financial Efficiency and the Ownership of Czech Firms By Jan Hanousek; Evžen Kočenda; Michal Mašika
  10. Corruption and Multinational Companies’ Entry Modes.Do Linguistic and Historical Ties Matter? By Marlene Grande; Aurora A.C. Teixeira
  11. Financial repression redux By Reinhart, Carmen; Kirkegaard, Jacob; Sbrancia, Belen
  12. Does Productivity Respond to Exchange Rate Appreciations? A Theoretical and Empirical Investigation By Yao Tang

  1. By: Thierry Bracke (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Irina Bunda (IMF-Singapore Regional Training Institute, 10 Shenton Way, MAS Building, Singapore 079117.)
    Abstract: The paper provides a measure of exchange rate anchoring behaviour across 149 emerging market and developing economies for the 1980-2010 period. An extension of the Frankel and Wei (2008) methodology is used to determine whether exchange rates are pegged or floating, and in the case of pegs, to which anchor currencies they are pegged. To capture the role of major currencies over time, an aggregate trade-weighted indicator is constructed based on exchange rate regimes of individual countries. The evolution of this aggregate indicator suggests that the US dollar has continuously dominated exchange rate regimes, despite some temporary decoupling during major financial crises. JEL Classification: F30, F31, F33.
    Keywords: de facto exchange rate regimes, international monetary system, emerging and developing economies, global currencies.
    Date: 2011–06
  2. By: Park, Cyn-Young (Asian Development Bank); Lee, Jong-Wha (Korea University)
    Abstract: Using both quantity- and price-based measures of financial integration, this paper shows an increasing degree of financial openness and integration in emerging Asian markets. This paper also assesses the impact of a regional shock relative to a global shock on local equity and bond markets. The findings of this paper suggest that the region’s equity markets are integrated more globally than regionally, although the degrees of both regional and global integration have increased significantly since the 1997/98 Asian financial crisis. However, emerging Asia’s local currency bond markets remain generally segmented, being neither regionally nor globally integrated. A case can be made for the benefits of increased regional integration of financial markets. Financial integration at the regional level allows for the region’s economies to benefit from allocation efficiency and risk diversification. The findings of this paper suggest that policymakers in the region must strike the right balance between maximizing the net benefits from regional and global financial openness, and minimizing the potential costs of financial contagion and crisis.
    Keywords: emerging Asia; financial integration; cross-border financial flows; crossborder asset holdings; convergence of asset returns
    JEL: F30 F36 F41 G15
    Date: 2011–05–01
  3. By: Geert Bekaert; Michael Ehrmann; Marcel Fratzscher; Arnaud J. Mehl
    Abstract: Using the 2007-2009 financial crisis as a laboratory, we analyze the transmission of crises to country-industry equity portfolios in 55 countries. We use an asset pricing framework with global and local factors to predict crisis returns, defining unexplained increases in factor loadings as indicative of contagion. We find evidence of systematic contagion from US markets and from the global financial sector, but the effects are very small. By contrast, there has been systematic and substantial contagion from domestic equity markets to individual domestic equity portfolios, with its severity inversely related to the quality of countries’ economic fundamentals and policies. Consequently, we reject the globalization hypothesis that links the transmission of the crisis to the extent of global exposure. Instead, we confirm the old “wake-up call” hypothesis, with markets and investors focusing substantially more on idiosyncratic, country-specific characteristics during the crisis.
    JEL: G15
    Date: 2011–06
  4. By: Laura Alfaro; Maggie Chen
    Abstract: We examine the differential response of establishments to the recent global financial crisis with particular emphasis on the role of foreign ownership. Using a worldwide establishment panel dataset, we investigate how multinational subsidiaries around the world responded to the crisis relative to local establishments. We find that, first, multinational subsidiaries fared on average better than local counterfactuals with similar economic characteristics. Second, among multinational subsidiaries, establishments sharing stronger vertical production and financial linkages with parents exhibited greater resilience. Finally, in contrast to the crisis period, the effect of foreign ownership and linkages on establishment performance was insignificant in non-crisis years.
    JEL: F1 F2 F36
    Date: 2011–06
  5. By: Kazi, Irfan Akbar; Guesmi, Khaled; Kaabia, Olfa
    Abstract: In this paper we investigate the contagion effect between stock markets of U.S and sixteen OECD countries due to Global Financial Crisis (2007-2009). We apply Dynamic Conditional Correlation GARCH model Engle (2002) to daily stock price data (2002-2009). In order to recognize the contagion effect, we test whether the mean of the DCC coefficients in crisis period differs from that in the pre-crisis period. The identification of break point due to the crisis is made by Bai-Perron (1998, 2003) structural break test. We find a significant increase in the mean of dynamic conditional correlation coefficient between U.S and OECD stock markets under study during the crisis period for most of the countries. This proves the existence of contagion between the US and the OECD stock markets. --
    Keywords: Financial crisis,integration,contagion,multivariate GARCH-DCC model
    JEL: E44 F15 F36 F41
    Date: 2011
  6. By: Renée Fry; Cody Yu-Ling Hsiao; Chrismin Tang
    Abstract: Episodes of extraordinary turbulence in global financial markets are examined during eight crises ranging from Asia in 1997-98 to the recent great recession of 2008-10. The analysis focuses on changes in the dependence structures of equity markets through correlation and coskewness to answer the question of whether the great recession is different to other crises in terms of shock transmission through contagion. The results show that ‘this time is different’ and that the great recession is truly a global financial crisis. Other US sourced crises do not affect other markets through contagion, and emerging market crises transmit unexpectedly.
    Date: 2011–06
  7. By: Huizinga, H.P.; Voget, J.; Wagner, W.B. (Tilburg University, Center for Economic Research)
    Abstract: This paper examines empirically how international taxation affects the volume and pricing of cross-border banking activities for a sample of banks in 38 countries over the 1998-2008 - period. Home country corporate income taxation of foreign-source bank income is found to reduce banking-sector FDI. Furthermore, such taxation is almost fully passed on into higher interest margins charged abroad. These results imply that international double taxation distorts the activities of international banks, and that the incidence of international double taxation of banks is on bank customers in the foreign subsidiary country. Our analysis informs the debate about additional taxation of the financial sector that has emerged in the wake of the recent financial crisis.
    Keywords: Cross-border banking;International taxation;Interest margins.
    JEL: G21 F23 H25
    Date: 2011
  8. By: Karel Báa (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic)
    Abstract: Equity home bias is a situation on equity market where domestic investors prefer invest too much into domestic equities despite the possible gains from diversification into foreign equities. Equity home bias can arise as a result of institutional or behavioral factors. In this paper I will compare the evidence with the prediction of the model of optimal portfolio with three different utility functions (Markowitz, Exponential and CRRA) the results of the investment experiment and the evidence from OECD (2009). The results have shown that in total the Czech investors are home biased (they hold 85 % of domestic equities in their equity portfolios). However, in experimental lab conditions were the students rather foreign biased. They have chosen only 14 % of Czech equities as opposed to the model recommendation of 22-54%. The possible reasons for foreign biasness in experimental conditions can be the absence of transaction and informational cost and explicit FX risk. Furthermore, I have discovered that the successful experimental investors have higher investment knowledge and that they trust in intuition.
    Keywords: Investment experiment, equity home bias, behavioral finance, optimal investment portfolio
    JEL: G11
    Date: 2011–08
  9. By: Jan Hanousek; Evžen Kočenda (Osteuropa-Institut, Regensburg (Institut for East European Studies)); Michal Mašika
    Abstract: In this paper we analyze the evolution of firm financial efficiency in the Czech Repub-lic. Using a large panel of more than 400,000 Czech firm/years we study whether firms fully utilize their resources, how firm financial efficiency evolves over time, and how firm financial efficiency is determined by ownership structure. We employ a panel ver-sion of a stochastic production frontier model for the period 1996–2007 with time-invariant efficiency. We differentiate among various degrees of ownership concentra-tion and their domestic or foreign origin. In a two-stage set-up we estimate the degree of firm inefficiency and then we estimate the effect of ownership structure on the distance from the efficiency frontier. Our results support the hypothesis that concentration and foreign ownership are positively related to financial efficiency.
    Keywords: financial efficiency, ownership structure, firms, panel data, stochastic frontier
    JEL: C33 D24 G32 L60 L80 M21
    Date: 2011–05
  10. By: Marlene Grande (Faculdade de Economia do Porto, Universidade do Porto); Aurora A.C. Teixeira (CEF.UP, Faculdade de Economia do Porto, Universidade do Porto; INESC Porto; OBEGEF)
    Abstract: Extant literature on FDI entry modes and corruption tend to convey the idea that corruption leads to the choice of low equity, i.e. joint-ventures with local partners, or non-equity modes, namely export and contracting, in order to avoid the contact with corrupt state officials. Recently, some studies argument that despite corruption, linguistic and historical ties between home and host countries guide MNCs to prefer high equity modes. Focusing on a rather unexplored setting, the African countries, most specifically the PALOP (Países Africanos de Língua Oficial Portuguesa), which includes countries with both very high (e.g., Guinea-Bissau, and Angola), high (e.g., Mozambique, Sao Tome and Principe) and middle (e.g., Cape Verde) levels of corruption, and that maintain quite close linguistic and historical ties with Portugal, we found that FDI entry mode is associated to the less corrupt markets. Thus, our results do not support the content that cultural and historical links are likely to perform an intermediating role in helping, through fostering foreign direct investment, African countries to overpass the dismissal growth that some have been facing in the last decades. On the contrary, our findings highlight the pressing need for these countries to combat corruption if higher economic growth via FDI attraction is envisioned.
    Keywords: Corruption, Emerging Economies, Entry mode
    JEL: F21 F23 K42
    Date: 2011–06
  11. By: Reinhart, Carmen; Kirkegaard, Jacob; Sbrancia, Belen
    Abstract: Periods of high indebtedness have historically been associated with a rising incidence of default or restructuring of public and private debts. Sometimes the debt restructuring is subtle and takes the form of, “financial repression.” In the heavily regulated financial markets of the Bretton Woods system, a variety of restrictions facilitated a sharp and rapid reduction in public debt/GDP ratios from the late 1940s to the 1970s. In this paper, we summarize our findings for the post-World War II period for a selected group of countries and document the resurgence of financial repression in the wake of the 2007-2009 financial crises and the accompanying surge in public debts in advanced economies.
    Keywords: debt; interest rates; regulation; financial repression
    JEL: E62 F3 E4 H6
    Date: 2011–06
  12. By: Yao Tang (Department of Economics, Bowdoin College)
    Abstract: Although real currency appreciations pose direct difficulties for exporters and import-competing firms as they will face more intense competition, is it possible that such competition spurs firms to improve productivity? To answer this question, the paper first constructs a theoretical model to show how the competitive pressures of currency appreciations induce firms to improve productivity by adopting new technologies. In addition, the model predicts that during appreciations there will be a positive relation between market concentration and improvements in productivity for industries highly exposed to trade, because the marginal benefits of productivity improvement will be bigger for firms with a larger market share. The paper then examines Canadian manufacturing data from 1997 to 2006, and finds evidence consistent with model predictions. I find that growth rates of labor productivity were on average higher during the Canadian dollar appreciation between 2002 and 2006, after controlling for industry characteristics. Within the group of highly traded Canadian industries, the more concentrated ones experienced larger growth in labor productivity.
    Keywords: exchange rate appreciation, productivity, technology adoption
    JEL: F3 F4
    Date: 2011–06

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