Degree Of Financial Integration Research Articles

Demographics and Real Interest Rates Across Countries and Over Time

We explore the implications of demographic trends for the evolution of real interest rates across countries and over time. To that end, we develop a tractable three-country general equilibrium model with imperfect capital mobility and country-specific demographic trends. We calibrate the model to study how low-frequency movements in a country's real interest rate depend on its own and other countries' demographic factors, given a certain degree of financial integration. The more financially integrated a country is, the higher the sensitivity of its real interest rate to global developments is, and the less its own real rate determinants matter. We then estimate panel error correction models relating real interest rates to many of its possible determinants-demographics included-imposing some restrictions motivated by lessons from our structure model. Results corroborate the importance of accounting for time-varying financial integration, and show global factors and life expectancy are relevant determinants of real interest rates.

Global banking, financial spillovers and macroprudential policy coordination

AbstractThe transmission of financial shocks and the gains from international macroprudential policy coordination are studied in a two‐region, core–periphery model with a global bank, a two‐level financial structure and imperfect financial integration. The model replicates the stylized facts associated with global banking shocks, with respect to output, credit, house prices and real exchange rate fluctuations in recipient countries, as documented empirically. Numerical experiments, based on a parametrized version of the model, show that the gains from coordination increase with the degree of financial integration, which raises the scope for spillback effects from the periphery to the core, through trade and private capital flows. However, even when coordination is Pareto‐improving, the resulting gains may be highly asymmetric across regions.

Do Islamic stock indexes integrated with conventional stock indexes?: Evidence from Indonesia and Malaysia

The portfolios performance that are develop either a substitute or complement in terms of risk-taking is important information for investors whether the return portfolio could hedge the risk of shock market. An understanding of volatility and the correlation between asset returns over time vary is highly important for investors (both domestic and international) with the sight of diversifying their portfolios for hedging from unexpected risk. The research method uses a DCC MGARCH approach to examine the correlation among two countries in time variant manner to indicate the degree of financial integration. With daily data from April 2012 until December 2017 and use 3 category index (composite, Islamic and conventional) the result shows that Malaysia and Indonesia have strong correlation. Among Islamic, composite and conventional have financial integration, but conventional index in Malaysia have the lowest integration from other index that it makes suitable for diversification. Unfortunately, conventional index that contain non halal product was not suitable for investor that sharp pointed into sharia. The shock in Malaysia’s Index will be perform different from historical or previous return. Contrary with Indonesia’s index, the return probably based on the historical. The implication of this research is we found that the Islamic investor could not have best diversification on the Malaysia and Indonesia market, since the Islamic index was sturdily correlated.

Designing QE in a fiscally sound monetary union

This paper develops a tractable two-country model of a monetary union with a sound fiscal governance structure and a portfolio balance channel and shows how in such environment the design of QE can be linked to well-understood findings applying to single economies. If the monetary union is symmetric and there is no portfolio balance channel, our linearised model converges to the canonical New Keynesian economy, in which central bank purchases of long-term debt (QE) are ineffective at the zero lower bound constraint for the short-term interest rate. However, if the portfolio balance channel is present, monetary policy in the form of both negative short-term interest rates (up to a certain endogenous lower bound) and QE becomes effective. We prove that for shocks of certain size there exists an interest rate rule, augmented by QE, which substitutes for negative short-term rates prescribed by a conventional interest rate rule without QE. We generalise this result to an asymmetric monetary union, allowing for asymmetric shocks and asymmetric structures. As long as asymmetries between countries result from shocks, outcomes under negative short-term rates can be replicated with a rule augmented by a symmetric design of QE. By contrast, asymmetric structures affecting the transmission of monetary policy can translate into an asymmetric QE design. In general, lower bound episodes in asymmetric monetary unions give rise to current account imbalances which are, depending on the degree of financial integration, funded by private capital imports or absorbed through the central bank balance sheet channel.

Financial crises and the perils for the world economy

In this paper, we wish to address the issue of financial crises. We focus on the causes and implications for the world economy and financial stability. For this reason, we attempt to identify the relative phenomena that encourage the emergence of financial crises. The amplification of the financial sector at the international level and the high degree of financial integration render the debate of financial crises solemnly significant. The world economy has become unstable and vulnerable to the emer- gence of unanticipated financial events. Such events are not simply limited to a large bank default but also to the inability of a multinational firm or an agent to validate their debts. Thus, we mainly emphasize the insights of Hyman Minsky into the global financial crisis, who suggested that the flaws of the current dominant financial status would eventually entail instability and probably lead to crises with contagion effects at the international level. Therefore, the aim of this paper is to indi- cate that the perils of financial crises for the global economy must be perceptible and considerable ex ante in order to be successfully confronted.

INTEGRATION OF US, JAPAN, AND CHINA POWERS INTO KOREAN & TAIWANESE STOCK MARKETS

ABSTRACT This research paper examines the financial integration of two developed and one emerging powers into the Korean and Taiwanese stock markets using weekly stock market returns from January 2003 to December 2015, analyzing before the crisis, during the crisis, and after the 2008-9 financial crisis. A VAR approach is used to indicate the degree of financial integration among the markets. The findings of this paper concurs with the view that the continued strength of growth in China benefits its market. As a result, the merits of investment diversification can be still achieved by investors participating in the Chinese stock market. However, it is conducive to note that the developed stock markets seems to be more integrated during the financial crisis period, which results in lesser benefits of diversification among them. Keywords Integration, stock markets

The Impact of BRICS Formation on Portfolio Diversification: Empirical Evidence from Pre- and Post-Formation Eras

This paper aims at contributing to the international portfolio investment decisions among the emerging BRICS countries where individual and institutional investors seek diversification benefits and to help in advocating policy changes and implementation as a response to the changing dynamics in these countries pre- and post-BRICS formation. Therefore, the context of this paper is aimed towards examining the short term causalities and long term integration among the BRICS stock market pre- and post-BRICS formation. The research applies the Augmented Dicker-Fuller (ADF) and Philips-Perron tests (PP) tests to analyze stationarity among the selected variables. The pre- and post-BRICS formation long-term linear relationship is investigated using Johansen and Juselius cointegration test while the Granger Causality is applied to assess the direction of the causality between the stock market indices. The study also extends the investigation by employing the impulse response function and variance decomposition to evaluate the reaction of each of the BRICS market to a shock from other BRICS stock markets. Weekly stock market indices of BRICS countries were used covering the period from January 2003 to December 2018. One key finding is that the degree of financial integration among the BRICS stock markets has moderately strengthened in the post-BRICS formation period compared to the pre-BRICS formation period. Another significant finding is that the Chinese stock market are mostly independent from other BRICS markets in the two aforementioned sub-periods, implying diversification benefits for the international investors both in the short and the long run. Further, the results also reveal a unidirectional causal relationship from the Russian stock market to its BRICS counterparts in both periods. Finally, the overall results show an increased responsiveness of stock markets in BRICS countries to shocks in each other after the formation of the bloc as compared to pre- formation period.

Threshold Effect of Financial Integration on Linkages Between Monetary Independence and Foreign Exchange Reserves

This paper investigates the relationship between monetary independence and its potential determinants A³ foreign exchange reserves, exchange rate stability, financial integration and inflation. This paper contributes to the literature by testing the threshold effect of the degree of financial integration on the relation between monetary independence and foreign exchange reserves. In particular, a linear model and a threshold model are compared using average cross-sectional data from 55 countries. The linear model shows that foreign exchange reserves increase monetary independence. Nonetheless, the threshold estimation indicates that foreign exchange reserves can maintain monetary independence when the degree of financial integration of a country is above a certain threshold value. Such a finding suggests that the relationship between monetary independence and foreign exchange reserves is subject to the degree of financial integration. Moreover, the evidence supports a weakening effect from financial integration to the phenomenon of A«fear of floatingA­.

Global financial cycle and Brazil’s financial integration

ABSTRACTRecent studies have discussed the influence of the global financial cycle on capital flows to emerging and developing countries. This paper evaluates the relationship between the greater degree of financial integration, and macroeconomic performance over the last two decades in Brazil. The literature has highlighted the Brazilian experience as being paradigmatic among emerging countries regarding the relationship between financial integration and regulation of capital flows to deal with boom and bust cycles. Methodologically, we employ a vector autoregressive model with error correction that allows us to evaluate the cointegration between the variables. Our main hypothesis is that a greater degree of financial integration is associated with negative developments in variables such as gross domestic product, country risk, interest rates, and exchange rate volatility. In addition, this study presents a further contribution by observing the existence of the interaction between the consequences of financial integration and the global financial cycle. More specifically, we found that: (i) an increase in the degree of financial integration generates deeper effects in downward periods of the global financial cycle; and (ii) a decline in that cycle generates greater impacts when a higher degree of financial integration is present.

International business cycles and financial frictions

In this study, I build a two-country DSGE model to investigate the impact of financial integration on business cycle co-movements with financial frictions. In this model, the investor can borrow but faces a collateral constraint that is tied to the value of her capital and real estate holdings. I show quantitatively that the degree of financial integration and real exchange rate adjustment are important for understanding business cycle synchronization under different types of shocks. With the technology shock, greater financial integration leads to lower cross-country correlations, while with the financial shock, greater financial integration leads to stronger cross-country correlations. These findings are consistent with the empirical evidence from the literature.

ON THE EFFECTIVENESS OF FISCAL DEVALUATIONS IN A MONETARY UNION

This paper examines the effects of fiscal devaluations in a model of a monetary union characterized by national fiscal policies and supranational monetary policy. We show that a revenue-neutral permanent tax shift in one country, which raises its consumption tax to finance a cut to labor taxes, increases welfare of the monetary union in the long run. The distribution of gains among countries depends on their degree of financial integration. We also document that price rigidities result in short-run welfare costs.

The Integration of the Chinese Stock Markets Following the ShanghaiiHong Kong Stock Connect: Evidence from Cointegration, Linear, and Nonlinear Causality Analysis

This study examines the impact of the Shanghai–Hong Kong Stock Connect on the degree of financial integration between the Hong Kong stock market and the Shanghai and Shenzhen stock markets in mainland China. By applying cointegration tests and linear and nonlinear Granger causality techniques on market capitalization and market index, we find that the stock markets from mainland China are increasingly influencing the Hong Kong stock market after the introduction of the Stock Connect scheme. Following the scheme’s introduction, the cointegration relationship between China and Hong Kong in terms of market capitalizations and market indices is also increasing. Moreover, Granger causality effects on market capitalizations and market indices from China remain strong, while the directional Granger cause of the two variables from Hong Kong to China has become weak or been rejected. Our study indicates that further opening of the Chinese stock markets enhances their leading roles, given that market capitalizations and market indices exhibit the highest degree of explanatory power regarding market correction toward long-run equilibrium. However with nonlinear causality test, our results indicate that Hong Kong stock market is still relevant to understand and predict China stock market after the introduction of the Stock Connect scheme.

The emergence of post-crisis regional financial institutions in Asia—with a little help from Europe

Faced with the negative impact of regional and global financial crises, Asian countries have established joint-solution mechanisms over the last two decades in order to better protect themselves from short-term outflows of capital and from currency speculation. Despite some progress being made in regional financial cooperation, especially by the countries of the ASEAN+3 grouping, the overall degree of financial integration within the region remains surprisingly low, however. This contrasts sharply with the keen interest of many Asian countries in gaining a stronger voice within the multinational finance institutions (MFIs), and especially within the International Monetary Fund (IMF). Unable to initiate major governance reforms of the MFIs, Asian countries have not only set up regional support liquidity arrangements but also their own multilateral development banks (MDBs). While the USA and to some extent Japan have tried to prevent a rebalancing of power within the global financial architecture, major European countries have actively supported these changes by becoming founding members of the China-led Asian Infrastructure Investment Bank (AIIB). Taking a New Institutional Economics (NIE) perspective, the paper aims to explain why some regional financial institutions are more attractive for Asian countries than others and why European countries are supporting Asia’s attempt to gain more weight in global financial governance (GFG)—and, thus, contribute to the acceleration of the power shift away from the USA toward emerging Asian economies in general and China in particular.

Bond Portfolio Allocations in South Africa Emerging Markets

Over the past fifty years, economic growth in emerging markets has been supported by investments in capital and technology from the developed world. The benefit of this development for the emerging markets, as measured by growth in income, employment, and wealth, is immediately apparent. There have also been significant advantages for the developed world through opportunities for higher risk adjusted returns from investments in emerging markets. This study explores the benefits of the diversification of global government bond portfolio, and provides complete performance evaluations of DMs with or without South Africa emerging market (SAEM) bonds. The study examines the benefits of inclusion of SAEM bonds in DMs, the degrees of financial integration among the research markets, the relative bond returns of dynamic factor models with time-varying coefficients and the robust tests of bond portfolio performance between DMs with SAEM and bond index. The results of this study provide important implications for global investors by identifying diversification gains in SAEM.

How Does the Sensitivity of Consumption to Income Vary Over Time? International Evidence

This paper studies how the sensitivity of consumption to income has changed over time as the degree of financial integration has risen. In standard theory, greater financial integration facilitates international borrowing and lending, helping to reduce the sensitivity of consumption growth to fluctuations in income. We examine the empirical validity of this prediction using an array of indicators of financial integration for a large sample of advanced and developing countries over the period 1960-2011. We report two main results. First, the sensitivity of consumption to income has declined over time as the degree of financial integration has risen. The decline has been more pronounced in advanced economies than in developing ones. Second, our regression analysis indicates that a higher degree of financial integration is associated with a lower sensitivity of consumption to income. This finding is robust to the use of a wide range of empirical specifications, country-specific characteristics and other controls, such as interest rates and outcome based measures of financial integration. We also discuss other potential sources of the temporal changes in the sensitivity of consumption to income.

How does the sensitivity of consumption to income vary over time? International evidence

This paper studies how the sensitivity of consumption to income has changed over time as the degree of financial integration has risen. In standard theory, greater financial integration facilitates international borrowing and lending, helping to reduce the sensitivity of consumption growth to fluctuations in income. We examine the empirical validity of this prediction using an array of indicators of financial integration for a large sample of advanced and developing countries over the period 1960–2011. We report two main results. First, the sensitivity of consumption to income has declined over time as the degree of financial integration has risen. The decline has been more pronounced in advanced economies than in developing ones. Second, our regression analysis indicates that a higher degree of financial integration is associated with a lower sensitivity of consumption to income. This finding is robust to the use of a wide range of empirical specifications, country-specific characteristics and other controls, such as interest rates and outcome-based measures of financial integration. We also discuss other potential sources of the temporal changes in the sensitivity of consumption to income.

The relationship between covariance risk and size effects in emerging equity markets

Purpose – The purpose of this paper is to examine whether the conditionally expected return on size-based portfolios in an emerging market (EM) is determined by the country’s world risk exposure. The authors analyze the degree of financial integration of 23 emerging equity markets grouped into five size portfolios using the conditional international asset pricing model with both world and domestic market risks. The authors also compare the model’s fitness on the predictability of portfolio returns by using world and EM indices. Design/methodology/approach – This study investigates whether large-cap stocks are priced globally and whether mid- and small-cap stocks are strongly influenced by domestic risk factors. The authors first examine the predictability of large-, mid-, and small-cap stock portfolio returns by using global and local variables, and next compare the model fitness by using world and EM indices on the prediction of size-based stock returns. Finally, the authors test whether the world price of covariance risk is the same for different portfolios. Findings – The authors find that the conditional expected returns of large-cap stocks should be priced by global variables. Mid- and small-cap stocks are influenced by domestic variables rather than global variables, and their returns are priced by local residual risks. The test of the conditional asset pricing model shows that the largest stocks have the smallest mean absolute pricing errors (MAE), and their pricing errors are lower in large markets than in small markets. Third, the EM index offers more predictability for the excess returns of mid- and small-cap stocks than the world market index, but the explanatory power of this index does not increase for large-cap stocks. Originality/value – EMs in the past were known as segment markets, with local risk factors more important than global risk factors, suggesting significant benefits from adding EMs to global portfolios. It would be interesting to examine whether financial integration differs for various firm sizes in the markets.

On International Consumption Risk Sharing, Financial Integration and Financial Development

ABSTRACTThis article investigates the empirical link between international consumption risk sharing, financial integration, and financial development for a group of twenty-nine developed and developing countries in the G7, the Euro area, and the OECD. Estimation results indicate that (1) risk sharing in the Euro area is higher than those in the G-7 and the OECD, and (2) a higher degree of risk sharing is associated with a greater degree of financial integration and a lower level of financial development. These results suggest that more financially integrated countries might be better able to insure themselves against idiosyncratic income shocks and countries with more developed financial markets might tend to engage in less consumption risk sharing with other countries thanks to their own sophisticated financial markets. Holding financial integration and financial development equal, countries in the Euro area engage in significantly more risk sharing than the ones in the G7 and the OECD.

Capital Mobility in the Enlarged Europe: A New Look at the Feldstein-Horioka Puzzle using a Quantile Regression Approach

Dans cet article, nous déterminons le degré d’intégration financière dans l’Europe élargie à 24 pays (EU-24) ainsi que dans deux sous-échantillons [anciens membres de l’UE (EU-14) et nouveaux membres de l’UE (NMS-10)] en reprenant l’approche analytique de Feldstein-Horioka [1980], c’est à dire en analysant économétriquement la relation, dans ces pays, entre l’épargne et l’investissement domestiques. Les résultats obtenus au moyen de la méthode des régressions quantiles en données de panel sont cohérents avec l’hypothèse d’un haut niveau de mobilité du capital entre les pays (EU-24). Nos résultats montrent aussi que, dans les pays où les rapports « investissement/PIB » sont plus élevés, ces besoins d’investissements sont moins contraints par l’épargne intérieure, alors que, dans les pays où le taux de l’investissement/PIB est faible, les deux rapports « investissement/PIB » et « épargne intérieure/PIB » sont davantage dépendants l’un de l’autre (ou liés l’un à l’autre). Ces principaux résultats sont confirmés par l’étude de la causalité au sens de Granger que nous avons menée, pour savoir si l’épargne intérieure joue un rôle actif pour financer l’investissement domestique dans l’Europe élargie. Nos résultats montrent que, globalement, la causalité au sens de Granger entre l’épargne et l’investissement est bidirectionnelle. Toutefois, pour certains pays de l’EU-24 aucune preuve de causalité au sens de Granger entre l’épargne et l’investissement domestiques n’a été trouvée.

Financial Integration, Exchange Rate Regimes in CEECs, and Joining the EMU: Just Do It. . .

Candidate countries of central and eastern Europe (CEECs) are suppose to join the EU in 2004, June, which imply that they will face important challenges in the conduct of macroeconomic policy, in order to be able to enter the ERM-II system and eventually enter the EMU (European Monetary Union). Abandoning an independent monetary policy might entail significant costs for countries, which have succeeded in recovering and are in a process of catching-up. However those costs have probably been exaggerated, and their estimation biased by the traditional optimal currency area criteria. The main criticism against a too strong emphasis on the latter rests on two arguments. The first one is that assessing the trade-off for joining the EMU does not deliver the same conclusion ex ante and ex post. Meanwhile, the degree of financial integration will likely increase dramatically, which in turns will decrease the opportunity cost of loosing the monetary policy for absorbing country specific shocks. In a world of capital mobility, the room left for an independent monetary policy is very narrow, maybe close to zero in small, emerging countries, more vulnerable to speculative attacks than countries in the core. The second argument is more empirical. While the link between the exchange rate regime and the fundamentals is rather weak, the political agenda of joining the EU and subsequently the EMU seems to explain the choice of the exchange rate regime.