nep-ifn New Economics Papers
on International Finance
Issue of 2015‒05‒30
two papers chosen by
Vimal Balasubramaniam
University of Oxford

  1. Trade Credit and Cross-country Predictable Firm Returns By Rui Albuquerque; Tarun Ramadorai; Sumudu W. Watugala
  2. International Financial Spillovers to Emerging Market Economies: How Important Are Economic Fundamentals? By Ahmed, Shaghil; Coulibaly, Brahima; Zlate, Andrei

  1. By: Rui Albuquerque (Catolica-Lisbon School of Business and Economics, Boston University); Tarun Ramadorai (SaId Business School, Oxford University); Sumudu W. Watugala (Office of Financial Research)
    Abstract: We investigate the role of trade credit links in generating cross-border return predictability between international firms. Using data from 43 countries from 1993 to 2009, we find that firms with high trade credit located in producer countries have stock returns that are strongly predictable based on the returns of their associated customer countries. This behavior is especially prevalent among firms with high levels of foreign sales. To better understand this effect we develop an asset pricing model in which firms in different countries are connected by trade credit links. The model offers further predictions about this phenomenon, including stronger predictability during periods of high credit constraints and low uninformed trading volume. We find supportive empirical evidence for these predictions.
    Keywords: international equity markets, trade credit, information asymmetry, customer-supplier relations, predictability
    JEL: G12 G14 G15
    Date: 2014–11–06
  2. By: Ahmed, Shaghil (Board of Governors of the Federal Reserve System (U.S.)); Coulibaly, Brahima (Board of Governors of the Federal Reserve System (U.S.)); Zlate, Andrei (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: We assess the importance of economic fundamentals in the transmission of international shocks to financial markets in various emerging market economies (EMEs). Our analysis covers the so-called taper-tantrum episode of 2013 and six earlier episodes of severe EME-wide financial stress since the mid-1990s. Cross-country regressions lead us to the following results: (1) EMEs with relatively better economic fundamentals suffered less deterioration in financial markets during the 2013 taper-tantrum episode. (2) Differentiation among EMEs set in quite early and persisted throughout this episode. (3) Controlling for economic fundamentals, we also find that, during the taper tantrum, financial conditions deteriorated more in those EMEs that had earlier experienced larger private capital inflows and greater exchange rate appreciation. (4) For earlier episodes, we find little evidence of investor differentiation across EMEs being explained by differences in their relative vulnerabilities during EME crises of the 1990s and early 2000s. (5) That said, differentiation across EMEs based on fundamentals does not appear to be unique to the 2013 episode. Differences in economic fundamentals played a role in explaining the heterogeneous EME financial market responses during the global financial crisis of 2008, and the role of fundamentals appeared to progressively increase through the European crisis in 2011 and subsequently the 2013 taper tantrum.
    Keywords: Emerging market economies; financial spillovers; economic fundamentals; vulnerability; depreciation pressure; taper tantrum; financial stress
    JEL: E50 F30
    Date: 2015–04–22

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