Beside large capital flows, euro area financial centres feature important and growing trade surpluses. We investigate the composition of their gross trade flows and disentangle (i) domestic and foreign production content that is (ii) directly traded with final absorbing economies or embedded in intermediates that are carried to final destination by partner countries. This accounting exercise uncovers that foreign production transiting through their borders accounts for most of the surpluses of financial centres but also that the net surplus in domestic value added traded directly with final consumers is twice as large as in other euro area economies. MNEs allocate the value created globally to financial centres. They do so through transfer pricing practices which undermine the correct representation of the external position of these countries with a bearing also on the external position of the euro area. Their participation in production chains also appears oddly large. When we replace the official trade statistics with predictions based on the gravity law of trade, the surpluses of main euro area financial centres disappear.
{"title":"What Value Added in the Trade Balances of Euro Area Financial Centres?","authors":"Virginia Di Nino, Anna Ekstam","doi":"10.2139/ssrn.3750713","DOIUrl":"https://doi.org/10.2139/ssrn.3750713","url":null,"abstract":"Beside large capital flows, euro area financial centres feature important and growing trade surpluses. We investigate the composition of their gross trade flows and disentangle (i) domestic and foreign production content that is (ii) directly traded with final absorbing economies or embedded in intermediates that are carried to final destination by partner countries. This accounting exercise uncovers that foreign production transiting through their borders accounts for most of the surpluses of financial centres but also that the net surplus in domestic value added traded directly with final consumers is twice as large as in other euro area economies. MNEs allocate the value created globally to financial centres. They do so through transfer pricing practices which undermine the correct representation of the external position of these countries with a bearing also on the external position of the euro area. Their participation in production chains also appears oddly large. When we replace the official trade statistics with predictions based on the gravity law of trade, the surpluses of main euro area financial centres disappear.","PeriodicalId":13701,"journal":{"name":"International Corporate Finance eJournal","volume":"69 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2020-12-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"86441826","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Aristeidis Samitas, Elias Kampouris, Stathis Polyzos, Anastasia Ef. Spyridou
This paper discusses the volatility spillovers between the Greek debt crisis and the Cypriot financial crisis. Cyprus was in the spotlight of financial markets due to significant problems stemming from the banking sector, which were dealt with by EU regulators with a bail-in on bank deposits. The current analysis aims to shed light on the reasons behind implementing this novel approach to bank distress. The study uses a Dynamic Conditional Correlation model on the returns of the stock markets of the two countries, which shows strong spillover effects during the period leading up to the 2013 Cypriot crisis, but a significant decrease of these effects from then on. The results confirm the close interdependence of the Greek and Cypriot economies before 2013 and show that this interdependence was limited from that point onwards. This would indicate that since the risk of contagion to the Eurozone had diminished, regulators could test the bail-in solution in Cyprus in 2015. The current work contributes to the discussion on the interdependence of European economies. The paper’s findings can also be applied to other emerging European economies.
{"title":"Spillover Effects between Greece and Cyprus: A DCC Model on the Interdependence of Small Economies","authors":"Aristeidis Samitas, Elias Kampouris, Stathis Polyzos, Anastasia Ef. Spyridou","doi":"10.2139/ssrn.3737253","DOIUrl":"https://doi.org/10.2139/ssrn.3737253","url":null,"abstract":"This paper discusses the volatility spillovers between the Greek debt crisis and the Cypriot financial crisis. Cyprus was in the spotlight of financial markets due to significant problems stemming from the banking sector, which were dealt with by EU regulators with a bail-in on bank deposits. The current analysis aims to shed light on the reasons behind implementing this novel approach to bank distress. The study uses a Dynamic Conditional Correlation model on the returns of the stock markets of the two countries, which shows strong spillover effects during the period leading up to the 2013 Cypriot crisis, but a significant decrease of these effects from then on. The results confirm the close interdependence of the Greek and Cypriot economies before 2013 and show that this interdependence was limited from that point onwards. This would indicate that since the risk of contagion to the Eurozone had diminished, regulators could test the bail-in solution in Cyprus in 2015. The current work contributes to the discussion on the interdependence of European economies. The paper’s findings can also be applied to other emerging European economies.","PeriodicalId":13701,"journal":{"name":"International Corporate Finance eJournal","volume":"37 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2020-11-24","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"73157501","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This study investigates the causal effects of corruption on firm centralization. Based on a unique setting in China that both parent firms’ and the whole group’s financial statements are mandatorily disclosed, we construct a novel proxy of centralization exploiting the allocation decision rights within group firms. We then verify the reliability of our measure and introduce a quasi-natural experiment (i.e., China’s anti-corruption campaign) to present that the reduction of corruption significantly enhances state-owned enterprises’ (SOEs’) centralization. A plausible mechanism is that the anti-corruption campaign reshapes firms’ external business environment and internal governance. Our findings are particularly pronounced for SOEs located in areas with high economic development/openness, low government intervention, better financing conditions, intensive industry concentration, and low ownership concentration.
{"title":"Does corruption shape firm centralization? Evidence from state-owned enterprises in China","authors":"Dongmin Kong, Ling Zhu","doi":"10.2139/ssrn.3832870","DOIUrl":"https://doi.org/10.2139/ssrn.3832870","url":null,"abstract":"This study investigates the causal effects of corruption on firm centralization. Based on a unique setting in China that both parent firms’ and the whole group’s financial statements are mandatorily disclosed, we construct a novel proxy of centralization exploiting the allocation decision rights within group firms. We then verify the reliability of our measure and introduce a quasi-natural experiment (i.e., China’s anti-corruption campaign) to present that the reduction of corruption significantly enhances state-owned enterprises’ (SOEs’) centralization. A plausible mechanism is that the anti-corruption campaign reshapes firms’ external business environment and internal governance. Our findings are particularly pronounced for SOEs located in areas with high economic development/openness, low government intervention, better financing conditions, intensive industry concentration, and low ownership concentration.","PeriodicalId":13701,"journal":{"name":"International Corporate Finance eJournal","volume":"92 11 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2020-11-23","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"87744146","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Serdar Kabaca, R. Maas, K. Mavromatis, Romanos Priftis
Les caracteristiques du marche obligataire jouent un role cle dans la transmission des mesures d’assouplissement quantitatif au sein d’une economie ouverte. Les marches obligataires des Etats peripheriques et des Etats du centre de la zone euro presentent de grandes differences. Par exemple, les Etats peripheriques preferent avoir dans leurs portefeuilles des obligations d’Etat a long terme emises sur leur marche national et misent moins sur les instruments a court terme pour reequilibrer leurs portefeuilles a la suite d’achats de titres dans le cadre d’un programme d’assouplissement quantitatif. Dans ces pays, la dette publique represente aussi une proportion plus importante du produit interieur brut. Nous construisons un modele a deux pays avec effets de reequilibrage des portefeuilles. Cette demarche nous permet d’etudier la politique monetaire optimale (ajustements de taux d’interet et programme d’assouplissement quantitatif) au sein d’une union monetaire. Le modele est caracterise par l’heterogeneite des portefeuilles entre les differentes regions. Dans le modele, la politique optimale en matiere d’assouplissement quantitatif est determinee non seulement par la taille de la region, mais aussi par les caracteristiques du portefeuille. Nous constatons qu’une politique monetaire optimale mettant a profit les ajustements de taux d’interet et l’assouplissement quantitatif eloigne l’union monetaire de la borne zero plus rapidement que ne le feraient les ajustements de taux d’interet seuls, qui necessitent des indications prospectives. En calibrant notre modele pour la zone euro, nous constatons que, idealement, la banque centrale racheterait davantage d’obligations d’Etats peripheriques que d’obligation d’Etats du centre. Ce choix s’explique par le fait que les portefeuilles des Etats peripheriques subissent de plus fortes frictions. Enfin, notre modele predit que les achats de la banque centrale qui refletent la pratique de la Banque centrale europeenne imposent une pression indesirable sur les Etats peripheriques.
{"title":"Optimal Quantitative Easing in a Monetary Union","authors":"Serdar Kabaca, R. Maas, K. Mavromatis, Romanos Priftis","doi":"10.2139/ssrn.3737379","DOIUrl":"https://doi.org/10.2139/ssrn.3737379","url":null,"abstract":"Les caracteristiques du marche obligataire jouent un role cle dans la transmission des mesures d’assouplissement quantitatif au sein d’une economie ouverte. Les marches obligataires des Etats peripheriques et des Etats du centre de la zone euro presentent de grandes differences. Par exemple, les Etats peripheriques preferent avoir dans leurs portefeuilles des obligations d’Etat a long terme emises sur leur marche national et misent moins sur les instruments a court terme pour reequilibrer leurs portefeuilles a la suite d’achats de titres dans le cadre d’un programme d’assouplissement quantitatif. Dans ces pays, la dette publique represente aussi une proportion plus importante du produit interieur brut. \u0000 \u0000Nous construisons un modele a deux pays avec effets de reequilibrage des portefeuilles. Cette demarche nous permet d’etudier la politique monetaire optimale (ajustements de taux d’interet et programme d’assouplissement quantitatif) au sein d’une union monetaire. Le modele est caracterise par l’heterogeneite des portefeuilles entre les differentes regions. Dans le modele, la politique optimale en matiere d’assouplissement quantitatif est determinee non seulement par la taille de la region, mais aussi par les caracteristiques du portefeuille. \u0000 \u0000Nous constatons qu’une politique monetaire optimale mettant a profit les ajustements de taux d’interet et l’assouplissement quantitatif eloigne l’union monetaire de la borne zero plus rapidement que ne le feraient les ajustements de taux d’interet seuls, qui necessitent des indications prospectives. En calibrant notre modele pour la zone euro, nous constatons que, idealement, la banque centrale racheterait davantage d’obligations d’Etats peripheriques que d’obligation d’Etats du centre. Ce choix s’explique par le fait que les portefeuilles des Etats peripheriques subissent de plus fortes frictions. Enfin, notre modele predit que les achats de la banque centrale qui refletent la pratique de la Banque centrale europeenne imposent une pression indesirable sur les Etats peripheriques.","PeriodicalId":13701,"journal":{"name":"International Corporate Finance eJournal","volume":"1 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2020-11-19","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"78603659","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
The abnormal decline in the number of US public firms is often blamed on merger activity, private equity investments, and stock market regulations. We compare and quantify the effects of these channels on the evolution of the US listing gap. In the US, an extra 100 mergers is associated with 41.56 additional missing public firms, whereas an extra 100 private equity deals is associated with 7.83 fewer missing listings. Regulatory changes, particularly the Sarbanes–Oxley Act of 2002, are also estimated to have a significant role in the decline of US listings. We then specify the types of mergers and private equity deals that most strongly affect listings in the US. Finally, we document that listing gaps emerge in other developed economies, with a few years of delay. The non-US listing gaps are driven by similar forces as in the US.
{"title":"Dissecting the Listing Gap: Mergers, Private Equity, or Regulation?","authors":"G. Lattanzio, W. Megginson, A. Sanati","doi":"10.2139/ssrn.3329555","DOIUrl":"https://doi.org/10.2139/ssrn.3329555","url":null,"abstract":"The abnormal decline in the number of US public firms is often blamed on merger activity, private equity investments, and stock market regulations. We compare and quantify the effects of these channels on the evolution of the US listing gap. In the US, an extra 100 mergers is associated with 41.56 additional missing public firms, whereas an extra 100 private equity deals is associated with 7.83 fewer missing listings. Regulatory changes, particularly the Sarbanes–Oxley Act of 2002, are also estimated to have a significant role in the decline of US listings. We then specify the types of mergers and private equity deals that most strongly affect listings in the US. Finally, we document that listing gaps emerge in other developed economies, with a few years of delay. The non-US listing gaps are driven by similar forces as in the US.","PeriodicalId":13701,"journal":{"name":"International Corporate Finance eJournal","volume":"12 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2020-11-10","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"74673664","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
As the Sino-U.S. relationship goes on a downward spiral, increasingly more strange things have come out to haunt the two biggest economies in the world. One of these things involves the idea to make China pay for the sovereign bonds issued by its predeceasing regimes almost a century ago. This paper takes the idea seriously and maps out the possible legal issues surrounding the revival of these bonds. Although two particular bonds show some potential for being revived – the Hukuang Railways 5% Sinking Fund Gold Bonds of 1911 and the Pacific Development Loan of 1937 – the private bondholders would likely not be able to toll the statute of limitations on the repayment claims based on these bonds. Even in the unlikely scenario that they succeed in doing so, the Chinese government would have an arsenal of contract law arguments against the enforcement of these bonds, most notably the duress and impracticality defense. By going into the details of the legal arguments and history of these bonds, we seek to confirm the obvious, that is, the idea of making China pays for these bonds is as far-fetched as they sound like and would not be taken seriously by the court.
{"title":"CONFIRMING THE OBVIOUS: WHY ANTIQUE CHINESE BONDS SHOULD REMAIN ANTIQUE","authors":"Brenda Luo, A. Xiao","doi":"10.2139/ssrn.3735597","DOIUrl":"https://doi.org/10.2139/ssrn.3735597","url":null,"abstract":"As the Sino-U.S. relationship goes on a downward spiral, increasingly more strange things have come out to haunt the two biggest economies in the world. One of these things involves the idea to make China pay for the sovereign bonds issued by its predeceasing regimes almost a century ago. This paper takes the idea seriously and maps out the possible legal issues surrounding the revival of these bonds. Although two particular bonds show some potential for being revived – the Hukuang Railways 5% Sinking Fund Gold Bonds of 1911 and the Pacific Development Loan of 1937 – the private bondholders would likely not be able to toll the statute of limitations on the repayment claims based on these bonds. Even in the unlikely scenario that they succeed in doing so, the Chinese government would have an arsenal of contract law arguments against the enforcement of these bonds, most notably the duress and impracticality defense. By going into the details of the legal arguments and history of these bonds, we seek to confirm the obvious, that is, the idea of making China pays for these bonds is as far-fetched as they sound like and would not be taken seriously by the court.","PeriodicalId":13701,"journal":{"name":"International Corporate Finance eJournal","volume":"2 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2020-11-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"89978110","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
The distinction between domicile and place of business is becoming more and more relevant as a growing number of firms have activities abroad. In most statistical studies of international stock returns, a firm is included in a country’s index if its headquarters are located in that country. This classification scheme ignores the operations of the firm. We propose, instead, to measure the firms’ exposures to “geographic zones” according to the place where they conduct business. As a representation of “geographic risks”, we synthesize zone factors from all firms in the dataset, be they domestic firms or multinationals. And we show the properties of the exposures to the zone factors.
{"title":"Firms&Apos; Exposures to Geographic Risks","authors":"B. Dumas, Tymur Gabuniya, R. Marston","doi":"10.3386/w28185","DOIUrl":"https://doi.org/10.3386/w28185","url":null,"abstract":"The distinction between domicile and place of business is becoming more and more relevant as a growing number of firms have activities abroad. In most statistical studies of international stock returns, a firm is included in a country’s index if its headquarters are located in that country. This classification scheme ignores the operations of the firm. We propose, instead, to measure the firms’ exposures to “geographic zones” according to the place where they conduct business. As a representation of “geographic risks”, we synthesize zone factors from all firms in the dataset, be they domestic firms or multinationals. And we show the properties of the exposures to the zone factors.","PeriodicalId":13701,"journal":{"name":"International Corporate Finance eJournal","volume":"9 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2020-11-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"78705871","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper attempts to account for the rising value of cryptocurrencies using basic concepts of monetary theory. A positive value of fiat money is itself problematic inasmuch as that value apparently depends entirely on its expected resale value. A current value entirely dependent on expected future resale value seems inconsistent with backward induction. While fiat money can avoid the backward-induction problem if it is made acceptable in payment of taxes, acceptability for tax payments is unavailable to cryptocurrencies. Is the rising value of bitcoin and other cryptocurrencies a bubble? The paper argues that network effects may be an alternative mechanism for avoiding the logic of backward induction. Because users of any good subject to substantial network effects incur costs by switching to an incompatible alternative to the good currently used, users of a bitcoin for certain transactions may be locked into continued use of bitcoin despite an expectation that its future value will eventually go to zero. Thus, even if bitcoin and other cryptocurrencies are bubble phenomena, network effects may lock existing users of bitcoin into continued use of bitcoin for those transactions for which bitcoins provide superior transactional services to those provided by conventional currencies. Nevertheless, the prospects for bitcoin’s expansion beyond its current niche uses are dim, because its architecture implies that a significant expansion in the demand for its transactional services would lead to rapid appreciation that is incompatible with service as a medium of exchange.
{"title":"Fiat Money, Cryptocurrencies, and the Pure Theory of Money","authors":"David Glasner","doi":"10.2139/ssrn.3724007","DOIUrl":"https://doi.org/10.2139/ssrn.3724007","url":null,"abstract":"This paper attempts to account for the rising value of cryptocurrencies using basic concepts of monetary theory. A positive value of fiat money is itself problematic inasmuch as that value apparently depends entirely on its expected resale value. A current value entirely dependent on expected future resale value seems inconsistent with backward induction. While fiat money can avoid the backward-induction problem if it is made acceptable in payment of taxes, acceptability for tax payments is unavailable to cryptocurrencies. Is the rising value of bitcoin and other cryptocurrencies a bubble? The paper argues that network effects may be an alternative mechanism for avoiding the logic of backward induction. Because users of any good subject to substantial network effects incur costs by switching to an incompatible alternative to the good currently used, users of a bitcoin for certain transactions may be locked into continued use of bitcoin despite an expectation that its future value will eventually go to zero. Thus, even if bitcoin and other cryptocurrencies are bubble phenomena, network effects may lock existing users of bitcoin into continued use of bitcoin for those transactions for which bitcoins provide superior transactional services to those provided by conventional currencies. Nevertheless, the prospects for bitcoin’s expansion beyond its current niche uses are dim, because its architecture implies that a significant expansion in the demand for its transactional services would lead to rapid appreciation that is incompatible with service as a medium of exchange.","PeriodicalId":13701,"journal":{"name":"International Corporate Finance eJournal","volume":"59 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2020-10-29","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"80623110","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Investigating how lending conditional programs of the International Monetary Fund (IMF) affect the unemployment rate. We apply four different empirical approaches accounting for the selection bias issue using a panel of 96 countries for the period of 1971-2015. We find that IMF loan programs have detrimental effects on the unemployment rate. Our results remain robust across alternative specifications and using alternative measures of IMF arrangements. There is evidence that significant short-run effects hold robust in the long-run. Lastly, our results indicate that the conditions – policy reforms included within the program increases the unemployment rate.
{"title":"The Effects of IMF Conditional Programs on the Unemployment Rate","authors":"M. Chletsos, Andreas Sintos","doi":"10.2139/ssrn.3515996","DOIUrl":"https://doi.org/10.2139/ssrn.3515996","url":null,"abstract":"Investigating how lending conditional programs of the International Monetary Fund (IMF) affect the unemployment rate. We apply four different empirical approaches accounting for the selection bias issue using a panel of 96 countries for the period of 1971-2015. We find that IMF loan programs have detrimental effects on the unemployment rate. Our results remain robust across alternative specifications and using alternative measures of IMF arrangements. There is evidence that significant short-run effects hold robust in the long-run. Lastly, our results indicate that the conditions – policy reforms included within the program increases the unemployment rate.","PeriodicalId":13701,"journal":{"name":"International Corporate Finance eJournal","volume":"17 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2020-10-14","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"83450480","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We investigate the role of bubbles on financial contagion using a set of developed economies. First, using the recursive flexible window right-tailed ADF-based procedure, we date stamp bubble periods in stock index series. Second, we capture contagion with a DCC multivariate GARCH framework. In a third step, we construct a panel by pooling across the time-series dynamic conditional correlations and bubbles to estimate various dynamic panel specifications that consider the endogenous nature of bubbles. We find statistically significant decreases in the dynamic correlations during periods of bubbles, which shows that the financial contagion between pair of countries diminishes when any of the two countries in the pair is going through a bubble period. This implies that during bubble periods investors are looking for an investment opportunity within their economy and rely less on international diversification. However, decrease in contagion between two economies could provide ample diversification opportunities for portfolio managers.
{"title":"Financial Contagion During Stock Market Bubbles","authors":"Diego Escobari, S. Sharma","doi":"10.2139/ssrn.3747334","DOIUrl":"https://doi.org/10.2139/ssrn.3747334","url":null,"abstract":"We investigate the role of bubbles on financial contagion using a set of developed economies. First, using the recursive flexible window right-tailed ADF-based procedure, we date stamp bubble periods in stock index series. Second, we capture contagion with a DCC multivariate GARCH framework. In a third step, we construct a panel by pooling across the time-series dynamic conditional correlations and bubbles to estimate various dynamic panel specifications that consider the endogenous nature of bubbles. We find statistically significant decreases in the dynamic correlations during periods of bubbles, which shows that the financial contagion between pair of countries diminishes when any of the two countries in the pair is going through a bubble period. This implies that during bubble periods investors are looking for an investment opportunity within their economy and rely less on international diversification. However, decrease in contagion between two economies could provide ample diversification opportunities for portfolio managers.","PeriodicalId":13701,"journal":{"name":"International Corporate Finance eJournal","volume":"22 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2020-10-10","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"83315390","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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