International Capital Market Research Articles

Power, Distributive Conflicts, and Multiple Growth Paths

This article shows that multiple growth paths may occurin a politico-economic model of endogenous growth. This multiplicityis characterized by the coexistence of the low-tax, low-capital-flightequilibrium and a high-tax, high-capital-flight equilibrium.The likelihood of multiplicity is crucially related to the structureof power in society—namely, it is necessary that the politicallydecisive agents have a greater access to international capitalmarkets than the average in the economy.

Partially Segmented International Capital Markets and International Capital Budgeting

Evidence suggests that international capital markets are neither fully integrated nor completely segmented. There is, however, currently no general method available for computing the required return on corporate investments with such capital markets. This paper uses a model of partially integrated international capital markets to derive optimal international capital budgeting rules. We show how capital budgeting rules depend on the level of costs to cross-border investment, both directly and also indirectly through the portfolio specialization they induce. We explain how required returns differ for different companies in such markets and how these 'costs of capital' may be estimated. We also explain how such differences in required returns can be consistent with general equilibrium and the effect they have on incentives for foreign direct investment.

A note on cointegration and international capital market efficiency

In a recent paper in the JIMF, Crowder (1994) claims that evidence that spot exchange rates are cointegrated and forward premiums are non-stationary implies international capital markets are not efficient. This note argues that the cointegration properties of spot exchange rates are independent of the efficiency or inefficiency of financial markets.

Social protection and political competition

This paper analyses how the level of social protection is determined when its choice depends on political competition. First, this is done under autarky. Then the analysis is extended to take account of the existence of an international capital market. We show that social protection never increases under international competition and, in several circumstances, drastically decreases.

A note on cointegration and international capital market efficiency: A reply

A note on cointegration and international capital market efficiency: A reply

Orthodox Approaches to Exchange Rate Determination: A Survey

The single most important development in international economic relations since World War II has been the exponential growth of international capital flows. By any standard, such transactions are now, far and away, the most numerous of all those that take place across national boundaries. As a consequence, they are also the dominant force in determining the demand for foreign currency (Harvey, 1991, 1993a, 1993b; Krause, 1991; Schulmeister, 1987; Shelton, 1994, p. 88). Over the same period, neoclassical economists have expressed increasing frustration over their failure to explain exchange rate movements (Dornbusch, 1987; MacDonald and Taylor, 1992, 1989; Pentecost, 1993; Visser, 1989). Despite the fact that this is one of the most well-researched fields in the discipline, not a single model or theory has tested well. The results have been so dismal that mainstream economists readily admit their failure. It is the premise of this paper that these two developments, the growth of the international capital market and the inability of the orthodox school to explain exchange rates, are related. The former has led to a situation in which the market for foreign currency, like Keynes' stock market, has become dominated by speculative activities (Keynes, 1964, pp. 147-164; Harvey, 1993a, 1993b, 1991; Krause, 1991; Schulmeister, 1987). Because neoclassical models have been slow to take this development into account, relying instead on the notion that some set of fundamental factors determines rates, the empirical performance of their models has been extremely poor. The paper proceeds as follows: First, there is a brief description of the growth of capital flows in international transactions. Next, the two most

An Intertemporal Model of International Capital Market Segmentation

This paper develops an intertemporal model of international capital market segmentation. Within the model, under various forms of segmentation/integration, the equilibrium asset prices and allocations, the risk-free interest rate, and the intertemporal consumption behavior and welfares of two countries are derived and compared. It is shown that the equilibrium interest rate is increased on integration, and that integrating markets may be significantly welfare decreasing for one of the countries. Conditions that may lead to a decrease in welfare are investigated. The conclusions as to the effects of segmentation on asset prices in the mean-variance model of the existing finance segmentation literature are also shown to break down in an intertemporal model.

Using chaos measures to examine international capital market integration

Weekly changes for the period 1980 to 1994 in six major stock indices (the US, Korea, Taiwan, Japan, Singapore and Hong Kong) and the World Index are examined. Also examined are the corresponding foreign exchange rates between the US and these five countries. Using spectral analysis, techniques of nonlinear dynamics and ordinary least squares regression, evidence of varying levels of market integration are documented. Some of the time series examined exhibit nonlinear dependencies.

National versus Global Influences on Equity Returns

Simple factor models of worldwide equity returns are used to explore the level and trend in international capital market integration. Global influences and national influences are of roughly equal importance in explaining the common movements in equity returns. Significant evidence indicates a trend toward increasing integration within the European Union, but not worldwide.

Raising Tourism Funds on International Capital Markets: Benefits, Problems and Strategies for China

Going public on international capital markets has emerged as a new means of raising tourism capital for China. By going public, China may enjoy the benefits of efficient capital markets and lower the cost of tourism capital. In raising tourism funds on international capital markets, however, China may encounter severe information asymmetry. To reduce information asymmetry, Chinese tourism enterprises need to overcome accounting incompatibility, select right capital markets, issue securities that are less risky and enhance business tourism.

Emerging markets and macroeconomic stabilization: With special reference to Asia Pacific economies

Abstract Market forces, structural factors, financial liberalization and concerted policy measures coalesced to globalize the financial markets. Initially Asia Pacific economies did not receive much attention from the international capital market but by 1990s the scenario underwent a considerable transformation. Rapid growth, macroeconomic stability and strong fundamentals made the region exceedingly attractive to international investors. Consequently, the region was highly successful in attracting foreign direct investment and securitized capital, which includes both equity and international bond investment. Volatility of securitized capital has always been a cause of worry. It is influenced by both the global factors and country‐economy‐related factors. Capital inflows have a great deal of impact on the demand for credit and money supply in the recipient economy. The Asia Pacific economies were highly successful in sterilizing the capital inflows. Volatility in external financial inflows can be notoriou...

Dynamic analysis of stock return volatility in an integrated international capital market

This paper examines the dynamic behavior of the stock return volatility for Canada, Japan, Germany, and the United Kingdom. The evidence indicates that international stock return volatility is mainly influenced by the U.S. stock return volatility and the exchange rate volatility, supporting the international capital market integration hypothesis. There seems to be some correlation between stock return volatility and macroeconomic volatility, but the effect is relatively weaker. In addition to the economic fundamentals, the noise component is found to be time varying, confirming the AR(MA)CH specifications in the stock return models.

International financial integration: Measurement and policy implications

Abstract This paper overviews work on the definition, measurement and implications of international financial integration. It first reviews the international parity relationships and three measures of the degree of international financial integration: namely, the savings‐investment correlation measure, the equalization of rates of return measure and the international capital market completeness measure. It points to the benefits of free international mobility of financial assets, including the facilitation of obtaining the gains from commodity and services trade, reducing risk, enabling the financing of high return investments and smoothing international consumption. It also points out the side effects including the relative effectiveness of alternative stabilization policies and their effects on savings and income distribution through their effects on the tax system. It concludes that free capital mobility is not a primal source of economic instability and policies aimed at restricting the free internati...

International Capital Markets and American Economic Growth.

International Capital Markets and American Economic Growth.

Consumption, Income, and International Capital Market Integration

This paper uses consumption patterns across countries to measure capital market integration. It argues that earlier empirical tests of this type were potentially misspecified and proposes a more robust specification. The results indicate that Japan was the only industrialized country for which national consumption was fully integrated with the rest of the world over the period 1973-92. The main source of failure is excess sensitivity of consumption to home income. Particularly within the European Community, however, there is also evidence that real interest rates are not equalized.

International Capital Market Pressures and Voluntary Annual Report Disclosures by U.S. and U.K. Multinationals

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The optimal taxation of savings and investment in an open economy

While the taxation of savings and of investment are equivalent in a closed economy, there is a real choice between the two in an open economy setting. A tax authority can, specifically, tax the return to domestic capital following the source principle, or it can tax the return to domestic savings following the residence principle. This paper examines the optimal joint taxation of savings and investment for a country that has access to the international capital market. Conditions under which such a country should tax only savings or investment are identified. Generally, however, countries optimally tax both savings and investment. Most countries' tax systems, indeed, are a mixture of the source and residence systems of taxation.

DECISION‐MAKING MODELS TO FACILITATE THE USE OF SWAPS IN GLOBAL CONTEXT

For many years interest‐rate and currency swaps have been used by multinational corporations' management as a hedge against unforeseen contingencies in the capital market. However, the current literature does not contain specific decision‐making criteria or models for use by company management to decide whether a swap should be preferred to alternative forms of obtaining debt in the capital market. This research presents models and criteria to be used by management in the decision‐making process to obtain a desirable swap transaction in a unified international capital market.

World Public Debt and Real Interest Rates

Real interest rates appear to have risen in virtually all industrialized countries relative to levels that prevailed in the 1960s and 1970s. There is increasing concern that this may reflect higher public debt, which is crowding out private sector activity. Over the last two decades, there has also been increasing international capital market integration. This suggests that interest rates in any country may be sensitive to global fiscal developments. This paper estimates the effects of aggregate fiscal developments in the industrialized world on real interest rates in nine industrial countries. The results imply that the increase in OECD-wide government debt since the late 1970s was a major factor explaining the rise in real interest rates.

Covered interest parity and international capital market efficiency

Tests of covered interest parity (CIP) are prevalent in the economics and finance literature. These studies demonstrate that there does exist some profitable deviations of exchange rates and interest rates from the equilibrium implied by CIP. Unfortunately, no conclusions regarding market efficiency can be drawn from such evidence since efficient markets do not preclude profitable deviations, only the persistence of such deviations. This study uses impulse response analysis on the CIP equilibrium of daily exchange rates and interest rates in order to analyze the persistence of arbitrage profits. The results suggest that risk free profits persist longer that can be reconciled with market efficiency. JEL Classifications: F31, F41, C32.