nep-ifn New Economics Papers
on International Finance
Issue of 2013‒03‒30
four papers chosen by
Vimal Balasubramaniam
University of Oxford

  1. Do foreign portfolio flows increase risk in emerging stock markets? Evidence from six Latin American countries 1999 -2008 By Diego Alonso Agudelo Rueda; Milena Castaño
  2. Quantifying Productivity Gains from Foreign Investment By Christian Fons-Rosen; Sebnem Kalemli-Ozcan; Bent E. Sørensen; Carolina Villegas-Sanchez; Vadym Volosovych
  3. Exchange Rate Determination, Risk Sharing and the Asset Market View By A. Craig Burnside; Jeremy J. Graveline
  4. A New Index of Financial Conditions By Koop, Gary; Korobilis, Dimitris

  1. By: Diego Alonso Agudelo Rueda; Milena Castaño
    Abstract: Foreign portfolio flows have been blamed for causing instability in emerging markets, especially during financial crises. This study measured the effect of foreign capital flows on volatility and exposure to world market risk in the six largest Latin American stock markets: Argentina, Brazil, Colombia, Chile, Mexico and Peru, for around 10 years including the 2008’s World financial crisis. This will test whether these flows cause instability for those markets and increase their exposure to international stock market returns. A proprietary database, from Emerging and time series models, both univariate (ARCH - GARCH) and multivariate (VAR), are used to estimate the effect foreign portfolio flows on the risk variables and the causality of these effects. We found no strong evidence to support the hypothesis that foreign flows cause instability in the Latin American stock markets, in spite of some evidence of causing price pressure. Instead, the evidence points to a strong dependence of market returns on international stock and foreign exchange markets, both in means and in volatility, instrumental to transmit crisis to those markets.
    Date: 2013–12–14
  2. By: Christian Fons-Rosen; Sebnem Kalemli-Ozcan; Bent E. Sørensen; Carolina Villegas-Sanchez; Vadym Volosovych
    Abstract: We quantify the causal effect of foreign investment on total factor productivity (TFP) using a new global firm-level database. Our identification strategy relies on exploiting the difference in the amount of foreign investment by financial and industrial investors and simultaneously controlling for unobservable firm and country-sector-year factors. Using our well identified firm level estimates for the direct effect of foreign ownership on acquired firms and for the spillover effects on domestic firms, we calculate the aggregate impact of foreign investment on country-level productivity growth and find it to be very small.
    JEL: E32 F13 F36 O16
    Date: 2013–03
  3. By: A. Craig Burnside; Jeremy J. Graveline
    Abstract: Recent research in international finance has equated changes in real exchange rates with differences between the marginal utility growths of representative agents in different economies. The asset market view of exchange rates, encapsulated in this equation, has been used to gain insights into exchange rate determination, foreign exchange risk premia, and international risk sharing. We argue that, in fact, this equation is of limited usefulness. By itself, the asset market view does not identify the economic mechanism that determines the exchange rate. It only holds under complete markets, and even then, it does not generally allow us to identify the marginal utility growths of distinct agents. Moreover, if we allow for incomplete asset markets, measures of agents' marginal utility growths, and international risk sharing, cannot be based on asset market and exchange rate data alone. Instead, we argue that in order to explain how exchange rates are determined, it is necessary to make specific assumptions about preferences, goods market frictions, the assets agents can trade, and the nature of endowments or production.
    Date: 2013
  4. By: Koop, Gary; Korobilis, Dimitris
    Abstract: We use factor augmented vector autoregressive models with time-varying coefficients to construct a financial conditions index. The time-variation in the parameters allows for the weights attached to each financial variable in the index to evolve over time. Furthermore, we develop methods for dynamic model averaging or selection which allow the financial variables entering into the FCI to change over time. We discuss why such extensions of the existing literature are important and show them to be so in an empirical application involving a wide range of financial variables.
    Keywords: financial stress; dynamic model averaging; forecasting
    JEL: C11 C32 C52 C53 C60 G17
    Date: 2013–03–13

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