Financial Market Integration Research Articles

Exchange rate pass-through at the individual product level: Implications for financial market integration

Global and regional integration of financial markets with enhanced international monetary transactions between economic agents increases the exchange rate risk. As this obstacle is growing at speed, market integration should be developed with a view to avoid this risk. In this study, we investigate exchange rate pass-through (ERPT) to examine who takes this risk. Specifically, we estimate the degree of ERPT for individual products by using primary auction price data of used/second-hand construction machinery purchased in Japan and then exported to Thailand for resale. Our empirical analysis of these data at the individual product level enables us to avoid bias in estimating ERPT caused by the use of aggregated data. We find that ERPT is asymmetric and changes in exchange rates are reflected in baht-denominated resale prices only when the baht appreciates against the yen. This indicates that raising resale prices in the destination market is more difficult for the exporters than lowering them, meaning that they can suffer significantly from the exchange rate risk. This paper serves as a reference for a safer financial market by learning how market players are influenced by the exchange rate in a trade market with a unique dataset.

ФІНАНСОВО-ПРАВОВА СКЛАДОВА ЄВРОІНТЕГРАЦІЙНОГО МЕХАНІЗМУ УПРАВЛІННЯ ПРИРОДНИМИ РЕСУРСАМИ В ПУБЛІЧНІЙ СФЕРІ

The article is devoted to mechanisms of securitization of natural resources through issuance of securities (stocks, bonds, derivatives, etc.) by companies that use natural assets. The necessity of creation of territorial corporations on management of natural resources on the basis of public-private partnership in the process of decentralization of management of natural resources is substantiated. It has been proved that in order to attract investments into the natural assets utilization in the national economy, it is necessary to transform the structure of management of natural assets in such a way that, in the organizational aspect of financing of territorial corporations on the management of natural resources, the leading role, along with banking institutions, should play collective (joint) investment institutions (institutional investors). Territorial corporations for managing natural resources can be created on the basis of public-private partnership in the process of decentralization of environmental management. International experience in the creation and operation of such structures is extremely relevant for Ukraine in the context of further development of the financial market and European integration. The advantage of a joint investment institute overt the banks is that a professional institutional investor can provide not only full confidence in the professional management of investment portfolios, but also brokerage services in those cases where the ultimate beneficiary is able to professionally manage his own investment capital by making a purchase or sales of securities and acting as a financial intermediary. Particularly attractive this form of investment is for a foreign investor who can invest in the national sphere of the use of natural assets through a professional intermediary who is well-informed and know both the national and local (regional, municipal level) securities markets. One and the objectives of the development of specialized joint investment institutes, which will operate in parallel with the project companies, territorial corporations for the management of natural resources, may be joint (consolidated) investment of specific investment projects through the formation of appropriate target investment portfolios. That is, an appeal to the institution of joint investment in this case may be bilateral – from the investor side – in order to find the desired investment instrument (shares, bonds, investment certificates, shares of a corporate investment fund, mortgages as well privatization and commodity securities) and on the part of the issuer of securities in order to find an investor. Thus, the institution of joint investment can perform the function of professional fundraising, the formation of asset pools for business entities operating in the field of the use of natural assets. The article presents the institutional and financial component of the eurointegration mechanism of management of natural resources. The EU legal base in the sphere of joint investment is analyzed.

Optimal Asset Allocation Strategies for International Equity Portfolios

With greater economic and financial market integration, it is critical for asset managers to choose the investment universe that provides superior diversification and performance op-portunities. Therefore, it is important to investigate whether international diversification benefits arise from industry rather than country allocations. We employ various asset alloca-tion strategies such as 1/N, ‘Risk-Parity’, Minimum-Variance as well as Mean-Variance, Bayes-Stein and Black-Litterman to analyze whether an industry-based or a country-based approach provides a superior performance. We also investigate time-varying effects for ex-pansionary and recessionary sub-periods, equity-only and equity-bond portfolios as well as portfolios with and without short positions. For the 1986-2020 period, we find that industry-based asset allocation strategies attain higher Sharpe and Omega ratios and higher alphas compared to country-based allocations. The Sharpe ratio differences are economically rele-vant yet statistically insignificant in many analyzed settings. The outperformance of sector allocations are independent of the optimization approach and implemented constraints and whether bonds are included in the investment universe. This is consistent with the observa-tion that countries have become more integrated and higher correlated than industries, re-sulting in lower country and relatively higher industry diversification benefits. Especially for periods with unpredictable shocks, industry allocations have superior performance. Our results have important implications for international asset allocation decisions.

Brexit and the battle for financial services

ABSTRACTThis paper analyses the policy developments concerning the Single Market in finance in the context of Brexit. Theoretically, we engage with two bodies of work that make contrasting predictions on European financial market integration and the development of European Union (EU) policies on financial regulation: one focused upon a neo-mercantilist ‘battle’ amongst member states and the other stressing the importance of transnational financial networks (or coalitions). Empirically, we find limited evidence of the formation of cross-national alliances in favour of the United Kingdom (UK) retaining broad access to the EU Single Market in financial services, the presence of which would have aligned with the expectations of analyses focused upon transnational networks. By contrast, the main financial centres in the EU27 and their national authorities competed to lure financial business away from the UK – what we explain in terms of a ‘battle’ amongst member states and their national financial centres.

The Effects of International Financial Integration in a Model with Heterogeneous Firms and Credit Frictions

This paper examines the consequences of international financial integration in a two-sector heterogeneous-agent dynamic general equilibrium model of occupational choice with financial constraints and idiosyncratic risks. We discuss the macroeconomic and distributional effects of financial market integration for small economies which differ only with respect to the tightness of constraints on the domestic credit market. The results contribute to an explanation of the ‘Lucas paradox’, i.e. the empirical observation of capital flowing from poor to rich countries, where lending countries are characterized by tighter domestic constraints and lower capital returns. Capital market liberalization goes along with adjustments towards the world return. Capital-exporting countries experience an increase in GNP, whereas the GDP effect is of ambiguous sign and driven by the tightness of the domestic credit market. Countries with less tight constraints or unlimited access to external business financing loose throughout integration due to a decline in aggregate output and a very unequal distribution of welfare gains and losses in the underlying heterogeneous-agent economy. We find that international integration is only beneficial for economies where financial constraints on entrepreneurial activity are very tight. Here, we observe an accumulation-driven rise in the entrepreneurship rate, overall positive output effects and welfare gains for all members of society.

The Effect of Financial Market Integration on Monetary Policy and Long-Term Interest Rate in Korea and Its Policy Implications

Financial market integration mitigates production shocks that occur in a country by pooling the risk through portfolio diversification and this contributes to consumption smoothing for life-time utility maximization. Financial market integration also contributes to economic growth by supplying capital to developing countries via the integrated financial market. However, the integrated financial market also serves as a transition channel where the financial shock which originated from the center country spreads to its neighboring economies. In the event of a financial crisis, there is a potential risk of capital flight from neighboring countries to the financial center, meaning that many countries in the integrated financial market have an economic structure that is vulnerable to external shocks. As the uncertainties in the international financial market increased significantly during the financial crisis, financial variables such as asset prices, leverage, credit growth, and capital flows in many countries were heavily affected by global financial market sentiments rather than their own monetary policies. This is evidence supporting that many countries in the global financial market have constrained monetary policies. In this report, we try to understand how monetary policy is constrained in the context of the international financial market, from which we can derive relevant policy implications. To this end we analyze how monetary policies are restricted by introducing the concept of monetary policy independence.

The Irrelevance of Brexit for the European Financial Market

Among participants in the global financial market, Brexit is commonly painted as an almost apocalypse-like scenario. The threat of a British exit from the European Union (EU) arguably involves a significant disruption to financial integration in Europe, which will threaten the pre-eminence of London as a global financial centre, and impose significant costs on all market participants. This paper takes a different position on the significance of Brexit for the European financial market. It argues that, in reality, the impact of Brexit for financial services will be minuscule, if not irrelevant. Such optimism is grounded in the economic stakes for both sides, the United Kingdom (UK) and the remaining EU countries (EU27), in retaining the benefits of access to the European Single Market for financial services. Given the joint economic interests, a likely outcome of the Brexit negotiations will be a solution that formally satisfies the 2016 referendum result, but in substance keeps Britain closely involved in the EU financial market. Alternatively, one should expect an agreement on the basis of regulatory equivalence. If an agreement is not achieved, private solutions by market actors are likely. The paper borrows from past examples in EU financial market integration that saw ingenious creativity at work in facilitating a desired outcome within the existing convoluted legal framework. These past experiences lead to the prediction of a similar approach being used for accommodating Brexit. The broader point is then that the EU financial services framework repeatedly sees a victory of politics or economics over the law—that is, formal legal problems or structures are brushed aside when political necessities or economic exigencies so require.

Unraveling the Financial Contagion in European Stock Markets During Financial Crises: Multi-Timescale Analysis

ABSRACTThe article investigates the evidence of financial contagion and market integration in selected European equity markets during nine major crises across regions. The focus is to identify whether (i) contagion evidence is pure or fundamental and (ii) dynamic evolution of integration is in the short run or long run. Wavelet decomposition in both its discrete and continuous forms is used. The findings reveal the following: (i) prior to the subprime crisis, contagion effects generated short-term shocks. The most recent US subprime crisis, however, reveals the evidence of fundamental based contagion. (ii) We find increasing short-run and long-run stock market integration, driven by several stages of the establishment of Economic and Monetary Union (EMU), questioning the ultimate benefits of formal entry into EMU membership.

FINANCIAL MARKET INTEGRATION IN ASIA: EVIDENCE FROM STOCK AND BOND MARKET

Financial integration especially in Asian financial market has been a defining feature of the world economy and has become a central issue in international finance for the past decades. However, there is limited empirical studies on the integration of Asian bond market. Therefore, this study aims to examine the financial market integration in Asia (Stock and Bond Market). The sample of this study is the major of Asian financial markets including Japan, China, Hong Kong, Singapore and South Korea during January 2009 – December 2016. Correlation, co-integration and causality tests used in this study to investigate the financial markets integrations. This study shows that both stock and bond returns are co-integrated and indicate as a common stochastic trends. Stock market integration appears to be much stronger compared to the less developed. This result is very important for investors to assess potential gains from portfolio diversification, and for a financial policymaker to manage market policies effectively and handle contagion risks that might be caused by international shock transmissions.

Market Integration, Country Institutions and IPO Underpricing

We extend the IPO literature analysing the role of financial market integration in the development of IPO markets and the pricing of newly listed stocks. Using a hierarchical linear model, we show that differences in underpricing between markets with high and low financial integration levels are economically significant and may explain the choice of location in the listing process. Firstly, market integration negatively affects the level of IPO underpricing by increasing the importance and efficiency of the financial intermediation process via tradable securities. Secondly, the presence of a deeper market integration has a moderation effect, which weakens the explanatory power of country institutions in the cross-country variation of IPO underpricing. Finally, we suggest a hierarchical structure be assumed for the modelling of cross-country IPO studies with heterogeneous country characteristics. Our results are robust to alternative measures of financial integration and several model specifications.

Financial Development, International Trade, and Stock Market Integration: Evidence in Six Southeastern Asia Countries

Measuring the integration degree of the national stock market is popular in the general globalization trend. This paper applies the measurement method of Chaiporn et al. (2016) to consider the Vietnamese stock market, and five other typical Asian economies in the period from 2000 to 2015. The authors’ method has its foundation in the research of Wälti (2011), An and Zhang (2013) and Dasgupta (2010). The paper adopted the fixed effect and random effect models to measure the impacts of financial development, financial integration and international trade integration to national stock market integration. The research findings revealed the positive affect of financial integration and development on the national stock market’s integration with the global stock market in Vietnam and five other countries. In addition the research found international trade integration does not affect the integrating securities market, possibly because the bilateral trade is too small to impact the bilateral stock market’s integration.

International financial market integration, asset compositions, and the falling exchange rate pass-through

This paper provides an explanation for the observed decline of the exchange rate pass-through into import prices by modeling the effects of financial market integration on the optimal choice of the pricing currency in the context of rigid nominal goods prices. Contrary to previous literature, we explicitly take into account the interdependence of this decision with the optimal portfolio choice of internationally traded financial assets. Following financial integration, agents use equity, additional to bonds, to hedge against shocks. The resulting optimal portfolio includes a higher share of bonds denominated in foreign currency and impacts the correlation structure of costs and sales in such a way that producers move towards more local-currency pricing. Both predictions are in line with novel empirical evidence.

ANALISIS SIMULTAN ANTARA ALIRAN MODAL, NILAI TUKAR DAN INFLASI DI INDONESIA PERIODE 2000.01 – 2012.09

Globalization and the open economic enchanced the integration of financial market and the economic condition in several countries. The effects of such integration shows in the movement of capital flows between countries. The potential risks of the capital flows, such as sudden reversal, the pressure on the exchange rate and high inflation and the susceptibility on financial sector, might be be arised. The goal of this research is to analyze the relationship between capital flows, exchange rates and inflation in Indonesia period 2000.01 – 2012.09. The method used in this research is simultaneous equations method. The model equations in this study are divided into two, which are a short-term investments are proxied from portfolio investment and long-term investments proxied from foreign direct investment. The results of the first model estimates the short-term investments shows that the exchange rate and inflation does not significant affecting short-term investments, but the ratio of domestic interest rates to foreign interest has a positive and significant impact on short-term investments. While, a short-term investments has negative and significant impact on exchange rate IDR per USD and inflation positive and significant effect on exchange rate. Factors affecting the rate of inflation is SBI interest rate and the money supply. One the other hand, the results of the second model estimation shows that the exchange rate and inflation has positive and significant impact on the flow of foreign direct investment. Inflation rate does not alter the terms of the investor’s decision in investing in Indonesia, because it was followed by the improvement in economic conditions in Indonesia.Keywords: Capital Flows, Exchange Rate, Inflation, Simultaneous Equation

On the Global Financial Market Integration Swooshh and the Trilemma

We propose a simple measure of de facto financial market integration based on a factor model of monthly equity returns, which can be computed back to the first era of financial globalization for 17 countries. Global financial market integration follows a “swoosh” shape – i.e. high pre-1913, still higher post-1990, low in the interwar period – rather than the other shapes hypothesized in earlier literature. We find no evidence of financial globalization reversing since the Great Recession as claimed in other recent studies. De jure capital account openness and global growth uncertainty are the two main determinants of long-run global financial market integration. We use our measure to revisit the debate on the trilemma between financial openness, the exchange rate regime, and monetary policy autonomy, and on whether the trilemma has recently morphed into a dilemma due to global financial cycles. We find evidence consistent with the trilemma and inconsistent with the dilemma hypothesis, both throughout history and for the recent decades; non-US central banks still exert more control over domestic interest rates when exchange rates are flexible in economies open to global finance.

Financial Market Integration: Evidence from Cross-Listed French Firms

Using high frequency data we investigate the behavior of the intraday volatility and the volume of eight cross-listed French firms. There is a two hour “overlap” period during which French firms are traded in Paris and their related American Depositary Receipts (ADRs) are traded in New York. Using concurrent 15-min returns, this article examines the extent of market integration—defined as prices in both markets reflecting the same fundamental information—involving these firms. Our results suggest that these markets are not perfectly integrated. A significant rise in volatility and volume is observed during the two hour “overlap” period. This suggests the existence of informed trading. An error correction model (ECM) is then used to examine changes in prices of French firms in Paris and New York. These temporary changes appear to converge over time.

The global financial market integration of selected emerging markets

PurposeThe purpose of this paper is to examine the degree of integration of emerging markets with the world market and amongst them. Further, the impact of the 2008 global financial crisis (GFC) on and structural breaks in the degree of integration are explored. The paper, additionally, analyses the behaviour of the level and the rate of change of the degree of integration around the period of the GFC.Design/methodology/approachThe paper relies on the R2 from a single factor world and the incremental R2 from a two-factor world and emerging market models as proxies for the global and emerging markets degree of integration, respectively. Relying on the Quandt test for unknown structural breakdates, the paper examines structural breaks in the degree of integration.FindingsThe degree of global integration of emerging markets exceeds their degree of integration with themselves, particularly in the recent period. Additionally, the GFC is a significant driver of the recent increase in world market integration. We observe significant structural shifts in both the degree of the world and emerging markets integration measures. The breaks in the world market integration largely coincide with the GFC, whereas that of the emerging market integration is dispersed. Also, the level of the world market degree of integration has reversed recently, although, the degree of world market integration remains above pre-crisis point.Practical implicationsThere exist high country-specific components in emerging market returns that are not accounted for by the world and emerging market factors despite the recent increase in global integration. Thusly, portfolios that diversify across emerging markets appear to have a high diversification potential. Additionally, substantial diversification gains may be realised with the inclusion of emerging market assets in global portfolios.Originality/valueThe paper shows that the emerging markets respond similarly to common global, although, diversely to emerging markets events. Additionally, evidence of the impacts of the GFC on the degree of global integration of emerging markets is presented.

Financial Market Integration in Asia: Analysis on Technology-Based Stocks

Financial Market Integration in Asia: Analysis on Technology-Based Stocks

Silver points, silver flows, and the measure of Chinese financial integration

To what degree were Chinese financial markets integrated with the rest of the world prior to the 1949 Revolution and to what extent was the Chinese foreign exchange market efficient during this period? We estimate silver points for the Shanghai market from 1905 to 1933 to answer these questions. Our inferred measures are small in value, favorably match measured costs of the silver trade derived from contemporary accounts, and fare well in the comparison to estimates of trans-Atlantic gold points. This leads to the conclusion that the degree of Chinese financial market integration was substantial. However, during and immediately after World War I, our estimates of the silver points increased appreciably, foreshadowing the collapse of China's linkages to world financial markets beginning in the 1930s.

The evolution of market power in European banking

This paper analyses the effect that European financial market integration has had on the evolution of the banks' market power disparities. The results show that market power disparity has narrowed among eurozone banks. The reduction is attributable to the convergence in the average levels of market power of the European banking sectors. In contrast, the disparities observed within each country have remained stable. As a result, the measures adopted to advance towards a single banking market should be complemented by measures at the national level designed to intensify competition among the banks within a given country.

Cross-border arbitrage and acquirers’ returns in the Eurozone crisis

Using a sample of 1263 European acquisitions over 2004–2012, we show that the performance of cross-border acquisitions is significantly affected by the Eurozone and the euro debt crisis. First, due to financial market integration and the elimination of exchange rate risk, intra-Eurozone acquisitions do not earn any abnormal returns for bidders. Second, as a result of the euro debt crisis and the temporary misvaluation among European countries, acquisitions earn positive abnormal returns only for non-Eurozone companies acquiring Eurozone targets. These abnormal returns are driven by the depreciation of the euro and the use of low-cost capital available to overvalued acquirers.