The paper develops an easy-to-apply test for contagion. In order to address the main challenge of any contagion test, that of endogeneity, the testing is conducted in the structural vector autoregression (SVAR) framework where we assume the reduced form errors follow a mixed-normal distribution. This distributional assumption enables us to use a recently developed SVAR model identification method with no need to restrict any of the instantaneous linkages between the variables. In the empirical part of the paper, we apply our test to the eurozone's ten years government bond spreads over Germany. In this maturity, the bond spreads mainly reflect governments' default risk. The years we consider are 2005-2010, and we find evidence of contagion in the spreads. Furthermore, it appears that, during the beginning of the euro debt crisis, there was transmission of government default risk from Greece to the other countries. However, Greece was not the only source country of contagion.
{"title":"Transmission of Government Default Risk in the Eurozone","authors":"Anssi Kohonen","doi":"10.2139/ssrn.2201441","DOIUrl":"https://doi.org/10.2139/ssrn.2201441","url":null,"abstract":"The paper develops an easy-to-apply test for contagion. In order to address the main challenge of any contagion test, that of endogeneity, the testing is conducted in the structural vector autoregression (SVAR) framework where we assume the reduced form errors follow a mixed-normal distribution. This distributional assumption enables us to use a recently developed SVAR model identification method with no need to restrict any of the instantaneous linkages between the variables. In the empirical part of the paper, we apply our test to the eurozone's ten years government bond spreads over Germany. In this maturity, the bond spreads mainly reflect governments' default risk. The years we consider are 2005-2010, and we find evidence of contagion in the spreads. Furthermore, it appears that, during the beginning of the euro debt crisis, there was transmission of government default risk from Greece to the other countries. However, Greece was not the only source country of contagion.","PeriodicalId":381709,"journal":{"name":"ERN: International Finance (Topic)","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2012-12-21","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"131177070","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 global factors associated with cross-border capital flows. We formulate a model of gross capital flows through the international banking system and derive a closed form solution that highlights the leverage cycle of global banks as being a prime determinant of the transmission of financial conditions across borders. We then test the predictions of our model in a panel study of 46 countries and find that global factors dominate local factors as determinants of banking sector capital flows.
{"title":"Capital Flows, Cross-Border Banking and Global Liquidity","authors":"Valentina Bruno, H. Shin","doi":"10.2139/ssrn.2020556","DOIUrl":"https://doi.org/10.2139/ssrn.2020556","url":null,"abstract":"We investigate global factors associated with cross-border capital flows. We formulate a model of gross capital flows through the international banking system and derive a closed form solution that highlights the leverage cycle of global banks as being a prime determinant of the transmission of financial conditions across borders. We then test the predictions of our model in a panel study of 46 countries and find that global factors dominate local factors as determinants of banking sector capital flows.","PeriodicalId":381709,"journal":{"name":"ERN: International Finance (Topic)","volume":"60 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2012-12-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"123681969","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 analyses the liquidity effect in Norway by examining the relationship between a range of liquidity variables and five different measures of the short-term interbank premium. In a floor system the key policy rate is equal to banks’ deposit rate in the central bank, and as such, this analysis provides new information on the liquidity effect in a floor system. Both excess liquidity (total central bank reserves in the banking system) and structural liquidity (central bank reserves in the system before Norges Banks’ market operations) have, as expected, a negative a significant effect on almost all dependent variables. Furthermore, in periods of financial turmoil European and Norwegian banks may face higher USD rates in the interbank market either because of a general USD liquidity premium or an institution specific credit premium. My analysis provides additional insight in the division between the liquidity premium and the credit premium in a way, to my knowledge, not done in earlier literature. The results indicate that during the financial crisis (2007-2009) the liquidity premium dominated in USD as the availability of credit deteriorated.
{"title":"The Daily Liquidity Effect in a Floor System – Empirical Evidence from the Norwegian Market","authors":"O. Syrstad","doi":"10.2139/ssrn.2261182","DOIUrl":"https://doi.org/10.2139/ssrn.2261182","url":null,"abstract":"This paper analyses the liquidity effect in Norway by examining the relationship between a range of liquidity variables and five different measures of the short-term interbank premium. In a floor system the key policy rate is equal to banks’ deposit rate in the central bank, and as such, this analysis provides new information on the liquidity effect in a floor system. Both excess liquidity (total central bank reserves in the banking system) and structural liquidity (central bank reserves in the system before Norges Banks’ market operations) have, as expected, a negative a significant effect on almost all dependent variables. Furthermore, in periods of financial turmoil European and Norwegian banks may face higher USD rates in the interbank market either because of a general USD liquidity premium or an institution specific credit premium. My analysis provides additional insight in the division between the liquidity premium and the credit premium in a way, to my knowledge, not done in earlier literature. The results indicate that during the financial crisis (2007-2009) the liquidity premium dominated in USD as the availability of credit deteriorated.","PeriodicalId":381709,"journal":{"name":"ERN: International Finance (Topic)","volume":"103 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2012-11-30","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"122627940","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}
Pub Date : 2012-11-01DOI: 10.5089/9781475513486.001
María González
We examine corporate sector vulnerabilities in Brazil, Chile, Colombia, Mexico and Peru. First, we identify stylized facts based on corporate financial indicators. Second, we assess vulnerability of individual firms to a sudden stop in financing through a probit model, using a panel of 18 countries in 2000-11. Results suggest that higher leverage and maturity exposures raise a firm’s probability to become exposed to a funding shock, while a larger firm size and buffers reduce it. Further, greater exchange rate flexibility can help mitigate corporate vulnerability. Identification of firms at risk through the model suggests that some vulnerabilities may be building in Latin America led by leverage, currency exposures and moderating buffers. These effects are partially offset, however, by a significant reduction in maturity exposures.
{"title":"Nonfinancial Firms in Latin America: A Source of Vulnerability?","authors":"María González","doi":"10.5089/9781475513486.001","DOIUrl":"https://doi.org/10.5089/9781475513486.001","url":null,"abstract":"We examine corporate sector vulnerabilities in Brazil, Chile, Colombia, Mexico and Peru. First, we identify stylized facts based on corporate financial indicators. Second, we assess vulnerability of individual firms to a sudden stop in financing through a probit model, using a panel of 18 countries in 2000-11. Results suggest that higher leverage and maturity exposures raise a firm’s probability to become exposed to a funding shock, while a larger firm size and buffers reduce it. Further, greater exchange rate flexibility can help mitigate corporate vulnerability. Identification of firms at risk through the model suggests that some vulnerabilities may be building in Latin America led by leverage, currency exposures and moderating buffers. These effects are partially offset, however, by a significant reduction in maturity exposures.","PeriodicalId":381709,"journal":{"name":"ERN: International Finance (Topic)","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2012-11-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"129987227","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 aim of this paper is to present different views on Black-Scholes model. The Black-Scholes equation is one of the most significant equations in financial mathematics. It is commonly used to determine price of options. However its applications as well as modifications go far beyond this market: it is utilized in fx currency market, IRS market, swaptions market and other. Therefore it is not surprising that Robert Merton and Myron Scholes were awarded Noble Prize for an invention of the model in 1997. This study presents key elements of the model as well as arguments for and against its adherence to real market conditions. The history of LTCM fund indicates that even appropriate model, when used inadequately, can bring heavy losses and disruption on the international financial market.
{"title":"The Nobel-Awarded Black Scholes Model: Key Characteristics and Its Applications to Option Valuation - Ultimate Collapse of LTCM Fund","authors":"Michal Rajkowski","doi":"10.2139/ssrn.2149823","DOIUrl":"https://doi.org/10.2139/ssrn.2149823","url":null,"abstract":"The aim of this paper is to present different views on Black-Scholes model. The Black-Scholes equation is one of the most significant equations in financial mathematics. It is commonly used to determine price of options. However its applications as well as modifications go far beyond this market: it is utilized in fx currency market, IRS market, swaptions market and other. Therefore it is not surprising that Robert Merton and Myron Scholes were awarded Noble Prize for an invention of the model in 1997. This study presents key elements of the model as well as arguments for and against its adherence to real market conditions. The history of LTCM fund indicates that even appropriate model, when used inadequately, can bring heavy losses and disruption on the international financial market.","PeriodicalId":381709,"journal":{"name":"ERN: International Finance (Topic)","volume":"21 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2012-09-20","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"134644841","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}
Increasing amounts of capital flows to developing countries and emerging markets tend to stimulate economic activity in these countries on one hand, and lead to serious macroeconomic fluctuations on the other hand. Foreign investors’ activities in an emerging market, specifically in a stock market can have serious implications over the stock market as well as the overall economy of that country. The primary purpose of this research is to analyze the causes of capital inflows by a VAR model, specifically monthly transactions by foreigners in Istanbul Stock Exchange (ISE), for the period January 1997 through December 2011. The model investigates the effects of Foreign Direct Investment, ISE Index, NYSE Index, US Treasury Bill and US Industrial Production over sales, purchases and net transactions of foreigner investors in ISE.
{"title":"VAR Analysis of the Determinants of the Foreigners’ Transactions in Istanbul Stock Exchange","authors":"Ali Hepşen, B. Ozkan","doi":"10.5539/IJEF.V4N10P180","DOIUrl":"https://doi.org/10.5539/IJEF.V4N10P180","url":null,"abstract":"Increasing amounts of capital flows to developing countries and emerging markets tend to stimulate economic activity in these countries on one hand, and lead to serious macroeconomic fluctuations on the other hand. Foreign investors’ activities in an emerging market, specifically in a stock market can have serious implications over the stock market as well as the overall economy of that country. The primary purpose of this research is to analyze the causes of capital inflows by a VAR model, specifically monthly transactions by foreigners in Istanbul Stock Exchange (ISE), for the period January 1997 through December 2011. The model investigates the effects of Foreign Direct Investment, ISE Index, NYSE Index, US Treasury Bill and US Industrial Production over sales, purchases and net transactions of foreigner investors in ISE.","PeriodicalId":381709,"journal":{"name":"ERN: International Finance (Topic)","volume":"111 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2012-09-12","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"124102463","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}
Pub Date : 2012-09-01DOI: 10.1111/j.1467-9442.2012.01703.x
Annika Alexius, Peter Sellin
Tentative evidence suggests that the empiricalfailure of uncovered interest parity (UIP) is confined to short-term interest rates. Tests of UIP for long-term interest rates are however hampered by various data problems. By focusing on short investments in long-term bonds, these data problems can be avoided. We study the relationship between the US dollar - Deutsch Mark exchange rate and German and American bond rates. The hypothesis that expected returns to investments in bonds denominated in the two currencies are equal cannot be rejected. This result is not simply due to low power as the beta-coefficients are close to unity. For the corresponding short-term interest rates, the typical finding of a large and significantly negative beta-coefficient is confirmed.
{"title":"Exchange Rates and Long‐Term Bonds","authors":"Annika Alexius, Peter Sellin","doi":"10.1111/j.1467-9442.2012.01703.x","DOIUrl":"https://doi.org/10.1111/j.1467-9442.2012.01703.x","url":null,"abstract":"Tentative evidence suggests that the empiricalfailure of uncovered interest parity (UIP) is confined to short-term interest rates. Tests of UIP for long-term interest rates are however hampered by various data problems. By focusing on short investments in long-term bonds, these data problems can be avoided. We study the relationship between the US dollar - Deutsch Mark exchange rate and German and American bond rates. The hypothesis that expected returns to investments in bonds denominated in the two currencies are equal cannot be rejected. This result is not simply due to low power as the beta-coefficients are close to unity. For the corresponding short-term interest rates, the typical finding of a large and significantly negative beta-coefficient is confirmed.","PeriodicalId":381709,"journal":{"name":"ERN: International Finance (Topic)","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2012-09-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"130270807","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 examine exchange-rate pass-through (ERPT) to prices in a model of dispersed information in which the nominal exchange rate imperfectly conveys information about the underlying fundamentals. If the information is complete, ERPT is also complete. Under dispersed information, we derive conditions under which our model displays three properties that are consistent with the stylized facts of pass-through. First, ERPT lies between 0 and 1 (incomplete ERPT). Second, ERPT is usually higher for imported goods prices than for consumer prices (exchange rate-consumer price puzzle). Third, there is a link between ERPT and macroeconomic stability.
{"title":"The Signaling Effect of Exchange Rates: Pass-Through under Dispersed Information","authors":"W. Areosa, M. Areosa","doi":"10.2139/ssrn.2126626","DOIUrl":"https://doi.org/10.2139/ssrn.2126626","url":null,"abstract":"We examine exchange-rate pass-through (ERPT) to prices in a model of dispersed information in which the nominal exchange rate imperfectly conveys information about the underlying fundamentals. If the information is complete, ERPT is also complete. Under dispersed information, we derive conditions under which our model displays three properties that are consistent with the stylized facts of pass-through. First, ERPT lies between 0 and 1 (incomplete ERPT). Second, ERPT is usually higher for imported goods prices than for consumer prices (exchange rate-consumer price puzzle). Third, there is a link between ERPT and macroeconomic stability.","PeriodicalId":381709,"journal":{"name":"ERN: International Finance (Topic)","volume":"15 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2012-08-08","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"127880931","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 OLS estimator is a weighted average of the slopes delineated by adjacent observations. These weights depend only on the independent variable. Equal weights are obtained if and only if the independent variable is normally distributed. This feature is used to develop a new test for normality which is compared to standard tests and provides better power for testing normality.
{"title":"Using OLS to Test for Normality","authors":"Haim Shalit","doi":"10.2139/ssrn.2111936","DOIUrl":"https://doi.org/10.2139/ssrn.2111936","url":null,"abstract":"The OLS estimator is a weighted average of the slopes delineated by adjacent observations. These weights depend only on the independent variable. Equal weights are obtained if and only if the independent variable is normally distributed. This feature is used to develop a new test for normality which is compared to standard tests and provides better power for testing normality.","PeriodicalId":381709,"journal":{"name":"ERN: International Finance (Topic)","volume":"16 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2012-07-14","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"123876161","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 study how information flows within international financial conglomerates and how such a flow reduces the transmission of liquidity crisis due to fire-sales. We focus on the role of international institutional investors affiliated with banks during the 2008-2009 global financial crisis. We argue that affiliation with banks provides international asset managers with an information advantage that lowers their incentive to herd with the uninformed fire-sales as the crisis emerges. This effectively provides price support to foreign stocks. We test this intuition using a comprehensive sample of non-North American firms with detailed information on international institutional holdings. We show that bank affiliation provides an informational advantage that more than offsets the disadvantages of foreign investors due to geography. During the crisis, the bank-affiliated investors increase stock liquidity, reduce extreme negative return realizations, lower short-selling demand and increase price informativeness.
{"title":"Fire-sales and Information Advantage: When Bank-Affiliation Helps","authors":"Lei Zhang, M. Massa","doi":"10.2139/ssrn.2097456","DOIUrl":"https://doi.org/10.2139/ssrn.2097456","url":null,"abstract":"We study how information flows within international financial conglomerates and how such a flow reduces the transmission of liquidity crisis due to fire-sales. We focus on the role of international institutional investors affiliated with banks during the 2008-2009 global financial crisis. We argue that affiliation with banks provides international asset managers with an information advantage that lowers their incentive to herd with the uninformed fire-sales as the crisis emerges. This effectively provides price support to foreign stocks. We test this intuition using a comprehensive sample of non-North American firms with detailed information on international institutional holdings. We show that bank affiliation provides an informational advantage that more than offsets the disadvantages of foreign investors due to geography. During the crisis, the bank-affiliated investors increase stock liquidity, reduce extreme negative return realizations, lower short-selling demand and increase price informativeness.","PeriodicalId":381709,"journal":{"name":"ERN: International Finance (Topic)","volume":"76 12","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2012-07-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"114017058","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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