International Capital Market Research Articles

The Correlation between Fx Rate Volatility and Stock Exchange Returns Volatility: An Emerging Markets Overview

This paper examines the relationship between the volatilities of equity indexes returns and FX rates for a set of emerging countries. We study the sensitivity of sector indexes volatility to FX rates volatility of local currencies with respect to the U.S. Dollar, the British Pound, and the Japanese Yen. Our empirical results largely support the hypothesis of a positive transmission mechanism between volatilities in equity and FX rates markets. Furthermore, although Ownership Restrictions and International Capital Market Controls have significant effects on the magnitude of the relation between FX rates volatility and stock returns volatility, the type of the FX rates regime does not affect this relationship. Our findings can be exploited for portfolios international diversification and adjustment of the risk management of multinational corporations. The model can also be extended using high frequency data.

Market Segmentation, Liquidity Spillover, and Closed-End Country Fund Discounts

In a segmented international capital market, illiquidity in the market in which the shares of a country fund are traded affects only the share price of the fund (S), while illiquidity in the market in which the underlying assets are traded affects only the fund net asset value (NAV). In an integrated market, illiquidity in one market can easily spill over to another and affect both the fund share price and its underlying asset value. It follows that the closed-end country fund premium, P=ln(S)-ln(NAV), is negatively (positively) affected by the share (asset) market illiquidity in segmented capital markets, but has only an ambiguous association with either share or asset market illiquidity in an integrated market. Empirical evidence from U.S.-traded single-country closed-end funds shows a strong negative (positive) association between the fund premium and the share (asset) market illiquidity, and the relation is much stronger for funds investing in segmented markets. The results suggest that relative market illiquidity plays a significant role in explaining the variation in closed-end country fund premia.

International Capital Markets and Foreign Exchange Risk

Author(s): Brennan, Michael J.; Xia, Yihong | Abstract: The relation between the volatilities of pricing kernels associated with di�erent currencies and the volatility of the exchange rate between the currencies is derived under the assumption of integrated capital markets, and the volatilities of the pricing kernels are related to the foreign exchange risk premium. Time series of pricing kernel volatilities are estimated from panel data on bond yields for five major currencies using a parsimonious term structure model that allows for time varying pricing kernel volatilities. The resulting estimates are used to test hypotheses about the relation between the volatilities of the pricing kernels in di�erent currencies and the volatility of the exchange rate. As predicted, time variation in foreign exchange risk premia is found to be related to time variation in both the volatility of the pricing kernels and the volatility of exchange rates: the estimated pricing kernel volatilities can account for the forward premium puzzle in an ‘average’ sense across exchange rates.

Getting Shut Out of the International Capital Markets: It Doesn't Take Much

We use a simple model of international lending to show that an emerging market borrower who might default can be shut out of international capital markets without warning. A modest haircut on obligations, for example, can shut down lending.

Getting Shut Out of the International Capital Markets: It Doesn't Take Much

We use a simple model of international lending to show that an emerging market borrower who might default can be shut out of international capital markets without warning. A modest haircut on obligations, for example, can shut down lending.

The Elasticity of Substitution across Maturities in International Capital Markets: A Simple Test

The paper tests the hypothesis of a maturity-independent foreign exchange risk premium or equivalently of a constant elasticity of substitution of international assets across the maturity spectrum. The empirical findings indicate that elasticity of substitution is indeed a function of maturity. In addition, the premia are found to be a monotonic function of the maturity distance between assets.

International Capital Markets and Informal Dollar Standards in the CIS and East Asia

Although most CIS and East Asian countries are de jure classified as free floaters, they de facto pursue (tight) dollar pegs. This paper emphasizes dollar denomination of shortterm and long-term payment flows as reasons for exchange rate stabilization. Based on the analysis of competitive depreciations and competitive appreciations among the CIS and East Asian currencies it is argued that the adherence to a common external anchor currency enhances macroeconomic stability. Finally, the potential of euro and ruble (CIS) as well as yen and yuan (East Asia) to challenge the dollar as anchor currencies in the respective regions is explored.

Accounting Reform in Transition Economies: A Case Study of Ukraine

This paper summarizes the results of interviews conducted at accounting firms and educational institutions in Kiev and Odessa during the summer of 2004, supplemented by later correspondence via the internet. Topics discussed include the adoption and implementation of International Financial Reporting Standards (IFRS), education for accounting practitioners, recent changes in accounting education in Ukrainian universities, accounting certification and taxation. Expertise in IFRS is in short supply in Ukraine. However, demand for knowledge of IFRS is also lacking, which provides little incentive for local Ukrainian accounting firms to develop expertise in this area. As a result, the top international accounting firms, mostly the Big-4, have captured most of the market for this expertise. Nearly all of the largest companies in Ukraine retain the services of one of the Big-4 and it is primarily the large companies that can see any use for IFRS, since it is mostly the largest enterprises that are going to the international capital market in search of capital. International investors demand to see financial statements that are prepared using either IFRS or U.S. GAAP as a condition of providing investment capital and the Big-4 accounting firms are best prepared to provide guidance and expertise in this area. Much of the IFRS training of practicing accountants is done by the Big-4 accounting firms. They have developed extensive course materials over the years and have a competitive advantage in this area. However, the training they provide is mostly limited to their employees and their clients, which means that accountants who do not work for either a Big-4 firm or one of their clients do not have ready access to IFRS training. Ukrainian universities have started to incorporate IFRS into their accounting curriculums. The problem is that they cannot always find good learning materials. Some of the most prestigious universities in Ukraine still do not have a course devoted just to IFRS. IFRS is inserted into their course on foreign accounting. Ukrainian financial statements that are certified by accountants who possess only a Ukrainian certification do not have much credibility in international capital markets. One reason for this lack of credibility is the perception that the average Ukrainian accountant does not meet international standards when it comes to knowledge of IFRS and International Standards on Auditing (ISA). Another reason is because the accounting certification system is viewed as corrupt. There are rumors that Ukrainian accounting certification can be bought. This problem is being overcome in two different ways. Several internationally recognized accounting certification exams are now being offered in Ukraine. Any Ukrainian accountant who can pass these exams earns instant credibility. The problem is that these exams are given only in English, which greatly limits the number of Ukrainian accountants who can take and pass the exams. This language barrier is being overcome by a group of accounting associations in several former Soviet republics, which began offering a high quality certification program in the Russian language. This certification started with a pilot program in Central Asia and has recently spread to Ukraine, Russia and Moldova. As this program spreads, the credibility of Ukrainian accountants who can pass these certification exams will be greatly enhanced.

Ordered Mean Difference Benchmarking, Utility Generators, and Capital Market Equilibrium

Designed as a fund performance measure, the ordered mean difference is extended to characterize zero‐surplus situations, such as a capital market equilibrium generated by arbitrary risk preferences. This enables nonparametric testing for whether CAPM applies and the detection of pricing inefficiencies or anomalies from historical data, including international capital market segmentation. Any risk‐averse utility function can be decomposed into a weighted average of elementary put option profiles (“gnomic” utility functions), which collectively generate the OMD areas. The investor's risk profile can be summarized as a representative gnome, so can the market risk premium. Pricing efficiency turns on whether such a representative gnome exists.

Exchange rate system and policy in the present world

The choice of exchange rate regime is important, not only in terms of its effect on trade flows, but also with respect to inflation expectations. Countries facing disinflation may find that pegs regimes are more appropriate solution. But where the trade balance account is significantly deteriorated and growth has been sluggish, a more flexible regime might be called for. The natural classification in eighties and early nineties suggests that intermediate regimes may provide important advantages ? to capture some of the benefits of both extremes while avoiding many of the costs. However today many experts predicted that exchange rate regimes would move in a "bipolar" manner to the extremes of "hard" pegs or free floats. An increasing number of countries did announce their intent to allow greater exchange rate flexibility. But, in practice, countries had a "fear of floating ". Distinction is made among advanced, emerging and other developing countries. Emerging markets have stronger links to international capital markets than do other developing economies. Thus, while non-emerging market developing economies may gain credibility through pegging their exchange rates, emerging markets find it harder to do so and could benefit from investing in "learning to float". More advanced economies with their access to international capital market are best positioned to enjoy the benefits of flexibility. It is found that the proportion of countries adopting intermediate regimes has indeed been shrinking in favor of greater flexibility or greater fixity, especially for countries more integrated with international markets. But, there is no final conclusion on the idea that intermediate regimes will dissapear.

International Capital Market Integration, Educational Choice and Economic Growth

This paper examines the impact of capital market integration (CMI) on higher education and economic growth. We take into account that participation in higher education is noncompulsory and depends on individual choice. Integration increases (decreases) the incentives to participate in higher education in capital-importing (-exporting) economies, all other things equal. Increased participation in higher education enhances productivity progress and is accompanied by rising wage inequality. From a national policy point of view, education expenditure should increase after integration of similar economies. Using foreign direct investment (FDI) as a measure for capital flows, we present empirical evidence which largely confirms our main hypothesis: An increase in net capital inflows in response to CMI raises participation in higher education and thereby fosters economic growth. We apply a structural estimation approach to fully track the endogenous mechanisms of the model.

Factor endowments and welfare levels in an asymmetric tax competition game

This paper addresses capital tax competition among an arbitrary number of countries. Countries are asymmetric not only in their population endowment but also in their capital endowment per inhabitant. National governments tax capital and labor in order to finance a fixed public budget. Asymmetric capital taxation arises at equilibrium leading to a distortion on the international capital market. We fully characterize how equilibrium taxes and welfare levels depend upon countries' population and capital endowments. We compare it to the autarky situation and show that fiscal competition erodes some, but not all, of the gains from capital markets liberalization.

International capital market integration: Implications for convergence, growth, and welfare

This paper studies the effects of international capital market integration on welfare and the speed of adjustment in a two-region endogenous growth model. Monopolistic firms undertake research and development (R&D) to improve their productivity level. National and international knowledge spillovers affect the returns to R&D. The two countries differ with respect to the initial productivity level and R&D capability (which is a proxy for human capital and structural policies). Long-run productivity gaps are determined by the difference in R&D capability. Over time, there is conditional convergence in productivity levels. The speed of convergence is larger with integrated international capital markets than without. Long-run gaps in consumption levels are larger in the former situation than in the latter. Capital market integration harms (benefits) the leading (lagging) region if domestic spillovers are more important than international spillovers and differences in R&D capabilities are small.

Regime change and debt default: the case of Russia, Austro-Hungary, and the Ottoman empire following World War One

We consider the effect of the three largest regime changes following World War One on the foreign debt repayments of the succeeding regimes. The Bolsheviks repudiated the Tsarist debt, both external and internal in early 1918, and could not borrow internationally until the 1970s. The Austro-Hungarian successor states, with the exception of Romania, remained on good terms with lenders, and quickly gained access to foreign capital. However, the Ottoman successor states entered into protracted negotiations before accepting responsibility for a share of the debt, which meant they faced a lengthy delay before being able to re-enter the international capital market. We analyze these events using a game theoretical model of incomplete information, whereby capital markets can not directly observe a government’s ‘type.’ We find that there were two main economic reasons why countries did not settle their debts after their regimes changed. Some countries, in particular Russia, did not value continued credit market access as highly as before, and second that international lenders will not trust a regime in default with a new loan.

Do Indirect Investment Barriers Contribute to Capital Market Segmentation?

AbstractUsing a sample of emerging market closed-end funds, I find evidence that indirect investment barriers exert powerful effects on asset pricing differences across countries. I show that not only do indirect investment barriers contribute to international capital market segmentation, but also they can lead to segmentation even in the absence of strong capital inflow restrictions. This result is consistent with Bekaert and Harvey's (1995) conclusion that “other markets appear segmented even though foreigners have relatively free access to their capital markets” (p. 403). The empirical results of this paper provide a rational market segmentation explanation of both premiums and discounts in emerging market closed-end funds, and they are consistent with the deterrent effect of indirect barriers on equity flows to emerging markets found in the capital flow literature.

Multinational Diversification and Corporate Performance: Evidence from European Firms

Abstract We investigate the empirical relationship between accounting based measures of performance and the degree of multinational diversification for a set of European chemical industry firms. We find that for these firms, the degree of multinational diversification is strongly related to superior financial performance. The results hold for each of the three sample years. The findings suggest that multinational firms outperform purely domestic and exporting firms. The results provide strong support for gains from multinational diversification. The results indicate that while greater European unification may have eroded potential benefits of exploiting international capital and product market imperfections, the benefits of firm specific economies of scope and scale as well as managerial and financial synergies are still realised through exports.

An empirical analysis of the German long-term interest rate

The short run and long run influences of the main determinants of the German long-term interest rate are estimated using quarterly data for the period 1982–2001. A major reason for the focus on the German interest rate is that this rate, and hence its determinants, will be dominant in explaining the developments of the long-term Euro-rate in the international capital market. The specification of the interest rate equation encompasses various theories on interest rate formation. Four of the analysed interest rate theories partially explain interest rate movement, and therefore together form an encompassing model in which the four theories are incorporated. The short-term German interest rate, the US and Japanese bond rates and the government balance appear to be the most prominent determinants of the German (and hence Euro) rate, but also the business cycle and the oil price have explanatory power of this interest rate.

Debt Crises and the Development of International Capital Markets

Crises on external sovereign debt are typically defined as defaults. Such a definition accurately captures debt-servicing difficulties in the 1980s, a period of numerous defaults on bank loans. However, defining defaults as debt crises is problematic for the 1990s, when sovereign bond markets emerged. In contrast to the 1980s, the 1990s are characterized by significant foreign debt-servicing difficulties but fewer sovereign defaults. In order to capture this evolution of debt markets, we define debt crises as events occurring when either a country defaults or its bond spreads are above a critical threshold. We find that our definition outperforms the default-based definition in capturing debt-servicing difficulties and, consequently, in fitting the post-1994 period. In particular, liquidity indicators are significant in explaining our definition of debt crises, while they do not play any role in explaining defaults after 1994.

Wealth Bias in the First Global Capital Market Boom, 1870–1913

Why do rich countries receive the lion's share of international investment flows? Although this wealth bias is strong today, it was even stronger during the first global capital market boom before 1913. Very little of British capital exports went to poor countries, whether colonies or not. This paper constructs panel data for 34 countries that as a group received 92% of British capital. It concludes that international capital market failure had only second-order effects on the geographical distribution of British capital. The three local fundamentals that mattered most were schooling, natural resources and demography.

Challenges for currency cooperation in East Asia

The defects of the current international financial system are creating tremendous distortions in the economies of East Asia. For the time being, most of the developing countries in East Asia have no choice but to adopt some sort of a flexible, wider band system (crawling band) while resorting to capital control when necessary, in order to avoid the recurrence of the Asian currency crisis. Japan's approach to building a stable international financial system in East Asia has gone through several stages since the late 1970s. Though the latest approach of setting up the Asian Bond Fund (ABF) is a step in the right direction, the ABF has severe limitations in reducing the risks for the developing countries in Asia. The ABF needs to be replaced by the Asian Bond Corporation (ABC) in order to develop an international capital market in Asia and use the abundant saving in Asia for financing the growth of Asia. In the process of expanding the activities of the ABC, Asia can adopt the notional common currency based on a basket of major currencies. That notional currency will pave the way toward introducing the Asian common currency, which can be the ultimate goal for the economic cooperation and integration in East Asia. In the meantime, while enhancing currency cooperation, East Asia needs a lender of the last resort in order to keep its economy from collapsing from another currency attack. Japan has been trying to play that role and is poised to take that responsibility as the largest and the most developed economy in the region. International capital markets and a truly international currency must be supported by numerous institutions and intellectual frameworks. Asia is yet to build those institutions. To help build those institutions, we in East Asia need to establish a new international research institution which would coordinate the strenuous intellectual efforts needed for building institutions that bolster the international capital market in Asia. The envisaged new institute can be dubbed the "Asian Monetary Institute," or "AMI."