nep-ifn New Economics Papers
on International Finance
Issue of 2016‒07‒30
four papers chosen by
Vimal Balasubramaniam
University of Oxford

  1. Has the Pricing of Stocks Become More Global? By Ivan Petzev; Andreas Schrimpf; Alexander F. Wagner
  2. International financial flows in the new normal: Key patterns (and why we should care) By Bussière, Matthieu; Schmidt, Julia; Valla, Natacha
  3. Countercyclical Foreign Currency Borrowing: Eurozone Firms in 2007-2009 By Philippe BACCHETTA; Ouarda MERROUCHE
  4. Equity is Cheap for Large Financial Institutions: The International Evidence By Priyank Gandhi; Hanno N. Lustig; Alberto Plazzi

  1. By: Ivan Petzev (University of Zurich); Andreas Schrimpf (Bank for International Settlements (BIS)); Alexander F. Wagner (University of Zurich, Centre for Economic Policy Research (CEPR), European Corporate Governance Institute (ECGI), and Swiss Finance Institute)
    Abstract: We show that in recent years global factor models have been catching up significantly with their local counterparts in terms of explanatory power (R2) for international stock returns. This catch-up is driven by a rise in global factor betas, not a rise in factor volatilities, suggesting that the effect is likely to be permanent. Yet, there is no conclusive evidence for a global factor model catch-up in terms of pricing errors (alpha) or a convergence in country-specific factor premia. These findings suggest that global financial markets have progressed surprisingly little towards fully integrated pricing, different from what should be expected under financial market integration. We discuss alternative explanations for these patterns and assess implications for practice.
    Keywords: International Asset Pricing, Size, Value, Momentum, Financial Integration, Factor Models
    JEL: F36 G12 G15
  2. By: Bussière, Matthieu; Schmidt, Julia; Valla, Natacha
    Abstract: This paper documents recent trends in international financial flows, based on a newly assembled dataset covering 40 advanced and emerging countries. It highlights four stylized facts: first, the "Great Retrenchment" that took place during the crisis has proved very persistent; second, this fall can predominantly be related to advanced economies, especially in Western Europe; third, net flows have fallen substantially relative to the years preceding the crisis; and fourth, profound changes have occurred in the composition of international financial flows in ways which should help to strengthen resilience and deliver genuine cross-border risk-sharing. This paper then turns to possible explanations for and likely implications of these changes, with regard to international financial stability issues.
    Date: 2016
  3. By: Philippe BACCHETTA (University of Lausanne and Swiss Finance Institute); Ouarda MERROUCHE (University of Lausanne and CEPR)
    Abstract: Despite international financial disintegration, we document a dramatic increase in dollar borrowing among leveraged Eurozone corporates during the Great Financial Crisis. Using loan-level data, we trace this increase to the twin crisis in the credit market and in funding markets. The reduction in the supply of credit by Eurozone banks caused riskier borrowers to shift to foreign banks, in particular US banks. The coincident rise in the relative cost of euro wholesale funding and the disruptions in the FX swap market caused a rise in dollar borrowing from US banks, especially for firms in export-oriented sectors. Although global bank lending is often reported to amplify the international credit cycle, we show that foreign banking acted as a shock absorber that weathered the real consequences of the credit crunch in Europe.
    Keywords: Money market, swaps, credit crunch, corporate debt, foreign banks
    JEL: G21 G30 E44
  4. By: Priyank Gandhi (Mendoza College of Business, University of Notre Dame); Hanno N. Lustig (Stanford Graduate School of Business; National Bureau of Economic Research (NBER)); Alberto Plazzi (USI-Lugano; Ecole Polytechnique Fédérale de Lausanne - Swiss Finance Institute)
    Abstract: Equity is a cheap source of funding for a country's largest financial institutions. In a large panel of 31 countries, we find that the stocks of a country's largest financial companies earn returns that are significantly lower than stocks of non-financials with the same risk exposures. In developed countries, only the largest banks' stock earns negative risk-adjusted returns, but, in emerging market countries, other large non-bank financial firms do. Even though large banks have high betas, these risk-adjusted return spreads cannot be attributed to the risk anomaly. Instead, we find that the large-minus-small, financial-minus-nonfinancial, risk-adjusted spread varies across countries and over time in ways that are consistent with stock investors pricing in the implicit government guarantees that protect shareholders of the largest banks. The spread is significantly larger for the largest banks in countries with deposit insurance, backed by fiscally strong governments, and in common law countries that offer shareholders better protection from expropriation. Finally, the spread also predicts large crashes in that country's stock market and output.
    Keywords: Banking crisis, Banking, Government bailouts
    JEL: G01 G21 G12

This nep-ifn issue is ©2016 by Vimal Balasubramaniam. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.