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on International Finance |
| By: | Koralai Kirabaeva; Assaf Razin |
| Abstract: | We survey several key mechanisms that explain the composition of international capital flows: foreign direct investment, foreign portfolio investment and debt flows (bank loans and bonds). In particular, we focus on the following market frictions: asymmetric information in capital markets and exposure to liquidity shocks. We show that the information asymmetry between foreign and domestic investors leads to inefficient investment allocation and borrowing in a country that finances its domestic investment through foreign debt or foreign equity. Exposure to liquidity shocks due to the mismatch of debt maturity may induce banking crises and cause sudden reversals of short-term capital flows. When there is asymmetric information between sellers and buyers in the capital market, then due to the adverse selection foreign direct investment is associated with higher liquidation costs than portfolio investment. The difference in exposure to liquidity shocks (in addition to asymmetric information) can explain the composition of equity flows between developed and emerging countries, and the patterns of foreign direct investments during financial crises. |
| JEL: | F3 |
| Date: | 2010–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:16492&r=ifn |
| By: | Travis J. Berge; Òscar Jordà; Alan M. Taylor |
| Abstract: | A wave of recent research has studied the predictability of foreign currency returns. A wide variety of forecasting structures have been proposed, including signals such as carry, value, momentum, and the forward curve. Some of these have been explored individually, and others have been used in combination. In this paper we use new econometric tools for binary classification problems to evaluate the merits of a general model encompassing all these signals. We find very strong evidence of forecastability using the full set of signals, both in sample and out-of-sample. This holds true for both an unweighted directional forecast and one weighted by returns. Our preferred model generates economically meaningful returns on a portfolio of nine major currencies versus the U.S. dollar, with favorable Sharpe and skewness characteristics. We also find no relationship between our returns and a conventional set of so-called risk factors. |
| JEL: | C44 F31 F37 G14 G15 |
| Date: | 2010–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:16491&r=ifn |
| By: | Ben Tomlin; Loretta Fung |
| Abstract: | In this paper, we examine how the effect of movements in the real exchange rate on manufacturing plants depends on the plant’s placement within the productivity distribution. Appreciations of the local currency expose domestic plants to more competition from abroad as export opportunities shrink and import competition intensifies. As a result, smaller less productive plants are forced from the market, which truncates the lower end of the productivity distribution. For surviving plants, appreciations can lead to a reduction in plant size, which, in the presence of scale economies, can lower productivity. We examine these mechanisms using quantile regression, which allows for the study of the conditional distribution of industry productivity. Using plant-level data that covers the entire Canadian manufacturing sector from 1984 to 1997, we find that many industries exhibit a downward sloping quantile regression curve, meaning that movements in the exchange rate do, indeed, have distributional effects on productivity. |
| Keywords: | Productivity; Exchange rates; Market structure and pricing |
| JEL: | D21 F1 L16 L60 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:10-25&r=ifn |
| By: | John Ammer; Fang Cai; Chiara Scotti |
| Abstract: | Emerging market (EM) assets have historically been regarded as inherently risky and particularly vulnerable to international shocks that result in a general increase in investor risk perceptions. In this paper, we assess the ongoing relevance of this view by examining the linkages between EM and non-EM stock and bond markets in the past two decades, with a focus on how these relationships played out during the global financial crisis of 2007-2009. We evaluate how these linkages have evolved over the period 1992-2009, through statistical tests of whether the volatility of EM financial markets changed - either in their response to international shocks originating in advanced economy markets or in their independent fluctuations. We find that over the longer period EM bond and stock prices have on average moved in the same direction as the prices of non-EM risky assets, and this co-movement has persisted. However, these relationships have evolved somewhat over time. Both EM sensitivity to international shocks and EM-specific volatility in EM sovereign bond spreads appear to have decreased over time, consistent with the greater fundamental stability of EM economies and perhaps a reduced inclination by investors to sell off EM assets in response to a rise in risk perceptions. Somewhat in contrast, while an upward trend in co-variation between EM and non-EM stock prices suggests an increasing degree of global market integration, idiosyncratic volatility has declined, consistent with a diminished level of locally-driven risk in these markets. In addition, the response of EM asset prices to the latest financial crisis appears to be moderate in comparison to historical experience. This evidence may reflect reduced EM vulnerability to external shocks in general, which is consistent with some encouraging improvements in the underlying fundamentals of EM economies over the decade preceding the onset of the crisis. |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:1006&r=ifn |
| By: | Paola Conconi (Université Libre de Bruxelles (ECARES); CEPR); André Sapir (Université Libre de Bruxelles (ECARES); CEPR); Maurizio Zanardi (Université Libre de Bruxelles (ECARES)) |
| Abstract: | We describe a simple model in which domestic firms decide whether to serve a foreign market through exports or horizontal foreign direct investment (FDI). This choice involves a trade-off between the higher variable trade costs associated with exports and the higher fixed set-up costs associated with establishing foreign subsidiaries. Crucially, firms are uncertain about their profitability in foreign markets and can only learn it by operating there. To obtain market-specific knowledge, firms may follow an “internationalization process”, serving the foreign market via exports first and eventually, in some cases, switching to local subsidiary sales. To assess the validity of the predictions of our model, we use firm-level data on export and FDI decisions in individual destination markets for all companies registered in Belgium over the period 1997-2008. We show that firms’ strategies to serve foreign markets depend not only on the variable and fixed costs associated with exports and FDI, but also on the export experience they have acquired in that market. |
| Keywords: | Exports, FDI, Uncertainty, Experimentation |
| JEL: | F10 D21 F13 |
| Date: | 2010–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbb:reswpp:201010-198&r=ifn |
| By: | Geert Bekaert (Columbia University; National Bureau of Economic Research); Campbell R. Harvey (Duke University; National Bureau of Economic Research); Christian T. Lundblad (University of North Carolina); Stephan Siegel (University of Washington) |
| Abstract: | We propose a new, valuation-based measure of world equity market segmentation. While we observe decreased levels of segmentation in many developing countries, the level of segmentation is still significant. In contrast to previous research, we characterize the factors that account for variation in market segmentation both through time as well as across countries. While a country’s regulation with respect to foreign capital flows is important in determining its level of segmentation, we find that non-regulatory factors are also related to the cross-sectional and time-series variation in the level of segmentation. We identify a country’s political risk profile and its stock market development as two additional local segmentation factors as well as the U.S. corporate credit spread as a global segmentation factor. |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:nbp:nbpmis:76&r=ifn |
| By: | Taiji Furusawa (Harvard University, Hitotsubashi University); Noriyuki Yanagawa (Faculty of Economics, University of Tokyo) |
| Abstract: | The paper examines the impacts of trade and capital movement between North and South, which differ in the quality of financial institution, on the productivity distri- bution and other characteristics of a financially-dependent industry. We find that financial imperfection causes firm heterogeneity and that trade and capital movement are complements in the sense that trade in goods affects the productivity distribu- tion only when accompanied by international capital movement (trade induces capital outflow from South when capital has been internationally mobile). We also find that an international difference in financial development induces reciprocal foreign direct investment. |
| Date: | 2010–10 |
| URL: | http://d.repec.org/n?u=RePEc:cfi:fseres:cf233&r=ifn |
| By: | Thierry Tressel; Dennis B. S. Reinhardt; Luca Antonio Ricci |
| Abstract: | Does capital flow from rich to poor countries? We revisit the Lucas paradox and explore the role of capital account restrictions in shaping capital flows at various stages of economic development. We find that, when accounting for the degree of capital account openness, the prediction of the neoclassical theory is confirmed: less developed countries tend to experience net capital inflows and more developed countries tend to experience net capital outflows, conditional of various countries’ characteristics. The findings are driven by foreign direct investment, portfolio equity investment, and to some extent by loans to the private sector. |
| Date: | 2010–10–19 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:10/235&r=ifn |
| By: | Silvio Contessi (Federal Reserve Bank of St. Louis, Reseach Division); Pierangelo De Pace (Pomona College, Department of Economics); Johanna Francis (Fordham University, Department of Economics) |
| Abstract: | Using formal statistical tests, we detect (i) significant volatility increases for various types of capital flows for a period of changes in business cycle comovement among the G7 countries, and (ii) mixed evidence of changes in covariances and correlations with a set of macroeconomic variables. |
| Keywords: | Capital Flows, International Business Cycles. |
| JEL: | E32 F21 F32 F36 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:frd:wpaper:dp2010-10&r=ifn |
| By: | Juan Yepez; Robert P. Flood; Nancy P. Marion |
| Abstract: | Currency crises are difficult to predict. It could be that we are choosing the wrong variables or using the wrong models or adopting measurement techniques not up to the task. We set up a Monte Carlo experiment designed to evaluate the measurement techniques. In our study, the methods are given the right fundamentals and the right models and are evaluated on how closely the estimated predictions match the objectively correct predictions. We find that all methods do reasonably well when fundamentals are explosive and all do badly when fundamentals are merely highly volatile. |
| Date: | 2010–10–13 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:10/227&r=ifn |