nep-ifn New Economics Papers
on International Finance
Issue of 2014‒06‒14
three papers chosen by
Vimal Balasubramaniam
University of Oxford

  1. International Evidence on the Interaction between Cross-Border Capital Flows and Domestic Credit Growth By Yavuz Arslan; Temel Taskin
  2. Stock Market Co-Movement and Exchange Rate Flexibility : Experience of the Republic of Korea By Yung Chul Park; Hail Park
  3. On the Fundamental Relation Between Equity Returns and Interest Rates By Jaewon Choi; Matthew P. Richardson; Robert F. Whitelaw

  1. By: Yavuz Arslan; Temel Taskin
    Abstract: The extent of interaction between international capital flows and macro-financial stability is an important and unsettled topic of debate. We contribute to this discussion by providing empirical evidence on the relationship between capital flows and domestic credit growth using a large cross-country panel dataset which includes both developed and developing economies. In the benchmark regression, we use a fixed effect model, and find a statistically significant and positive co-movement between the two variables, which is consistent with common wisdom and recent theory a la Bruno and Shin (2014). This empirical regularity is more pronounced in upper-middle income countries in comparison with the lower-middle and high income countries. The main results are robust to other econometric specifications and a variety of alternative measures for credit growth and capital flows.
    Keywords: Cross-border capital flows, Domestic credit growth, Macro-financial stability, Cross-country evidence
    JEL: E51 F32 G15
    Date: 2014
  2. By: Yung Chul Park (Asian Development Bank Institute (ADBI)); Hail Park
    Abstract: This paper argues that for countries where equity investments dominate cross-border capital flows, the proper framework for analyzing the role of a flexible exchange rate system as a buffer against external shocks is the uncovered stock return parity condition, rather than the uncovered interest parity condition. Estimation of the stock return parity condition shows that it fails to hold in the Republic of Korea largely because of co-movement in the Republic of Korea and United States stock markets. Three global factors are largely responsible for the co-movement : global financial integration, which may be generating a global financial cycle; acceptance of insensitivity of exchange risk by global equity investors; and domestic investors imitating the trading behavior of foreign equity investors.
    Keywords: equity investment, cross-border capital flows, flexible exchange rate system, stock return parity condition, interest parity condition, the Republic of Korea, Stock Markets, co-movement
    JEL: F31 G15
    Date: 2014–05
  3. By: Jaewon Choi; Matthew P. Richardson; Robert F. Whitelaw
    Abstract: This paper uses contingent claim asset pricing and exploits capital structure priority to better understand the relation between corporate security returns and interest rate changes (i.e., duration). We show theoretically and, using a novel dataset, confirm empirically that lower priority securities in the capital structure, such as subordinated or distressed debt and equity, have low or even negative durations because these securities are effectively short higher priority, high duration fixed rate debt. This finding has important implications for interpreting existing results on (i) the time-varying correlation between the aggregate stock market and government bonds, (ii) the use of bond factors for multifactor asset pricing models and forecasting bond and stock returns, (iii) the Fisher effect and inflation, and (iv) the betas of corporate bonds.
    JEL: G12 G13 G32
    Date: 2014–06

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