Leverage Constraints and the International Transmission of Shocks

Recent macroeconomic experience has drawn attention to the importance of interdependence among countries through financial markets and institutions, independently of traditional trade linkages. This paper develops a model of the international transmission of shocks due to interdependent portfolio holdings among leverage‐constrained investors. In our model, without leverage constraints on investment, financial integration itself has no implication for international macro comovements. When leverage constraints bind, however, the presence of these constraints in combination with diversified portfolios introduces a powerful financial transmission channel that results in a positive comovement of production, independently of the size of international trade linkages. In addition, the paper shows that with binding leverage constraints, the type of financial integration is critical for international comovement. If international financial markets allow for trade only in noncontingent bonds, but not equities, then the international comovement of shocks is negative. Thus, with leverage constraints, moving from bond trade to equity trade reverses the sign of the international transmission of shocks.     

Does institutional ownership matter for international stock return comovement?

We study the link between international stock return comovements and institutional investment. We test whether the rise of institutional ownership has increased cross-country correlations and decreased cross-industry correlations. Using stock-level institutional holdings across 45 countries during the 2001–2010 period, we find that industry and global factors are relatively more important the country factors in explaining stock return variation among stocks with higher institutional ownership. Industry diversification strategies are more beneficial than country diversification strategies for stocks with high institutional ownership. We show that cross-border portfolio investment is a powerful force of international capital market integration and convergence of asset prices.     

Spatial modeling of stock market comovements

We model the complex global dependencies in international financial markets using spatial techniques. Our methodology allows us to go beyond conventional correlation analyses and volatility-spillover models confined to studying pairwise relationships, and improves the accuracy of return predictions. We find that stock market comovements are unrelated to geographical proximity, and that financial linkages, as measured by foreign direct investment (FDI) ties, are important in accounting for markets comovements. Our results suggest that the proposed measure of financial distance, coupled with spatial methodology, captures fairly accurately the dependencies in the world financial markets, providing important implications for policymaking and portfolio management.     

International investment patterns: Evidence using a new dataset

This paper examines the bilateral, source and host factors driving portfolio equity investment across a set of countries using International Monetary Fund's new dataset on international equity holdings at the end of 1997, 2001 and 2002.The paper finds that the bilateral equity investment is strongly correlated with the underlying patterns of trade in goods and services. The information asymmetries and cultural-institutional proximity are important for bilateral equity investment. The size of domestic stock market is the key correlate of aggregate foreign portfolio equity asset and liability holdings. The scale of aggregate foreign equity asset holdings is larger for countries having high income per capita.     

Why Invest in Emerging Markets? The Role of Conditional Return Asymmetry

We propose a quantile‐based measure of conditional skewness, particularly suitable for handling recalcitrant emerging market (EM) returns. The skewness of international stock market returns varies significantly across countries over time, and persists at long horizons. In EMs, skewness is mostly positive and idiosyncratic, and significantly relates to a country's financial and trade openness and balance of payments. In an international portfolio setting, return asymmetry leads to sizeable certainty‐equivalent gains and increases the weight on emerging countries to about 30%. Investing in EMs seems to be about expectations of a higher upside than downside, consistent with recent theories.     

Time-varying linkages between energy and stock markets: Dynamic spillovers and driving factors

Integration between international energy prices and stock market returns is critical for global economics and politics. In this study, we employ a TVP-VAR (time-varying parameter vector autoregression) connectedness decomposition approach to investigate the time-varying linkages between a diversified energy portfolio comprising oil, coal, natural gas, and stock returns in G7 countries and China. This approach allows us to show the dynamic spillovers and explore the driving factors underlying the dynamic patterns. We find that geopolitical risks, global economic policy uncertainties, and equity market volatility can influence cross-market spillovers. This study expounds the effect of energy financialization.     

Stock Market Valuation,Foreign Investment,and Cross-Country Arbitrage

This study investigates the role of stock market valuation and cross-country arbitrage in shaping foreign direct and indirect investments, contingent upon a country's stage of development. This paper is built upon the mispricing-driven foreign investment hypotheses developed by Baker, Foley, and Wurgler (2009). Interesting findings emerge when developed and emerging markets are considered separately. Empirical evidence indicates that the use of relatively cheap financial capital for foreign investment is prominent among developed countries, but not so in emerging markets. This is largely due to the extremely low level of foreign investment outflows in emerging markets and the inability of unsophisticated emerging market managers to successfully time the market. Further investigation shows that host-country stock market valuation is an important determinant of the mode of foreign investment; investors tend to choose indirect or portfolio investment, as opposed to direct investment, when the stock market is perceived to be undervalued. This is especially the case in emerging markets, where there is more room for misvaluation and potential arbitrage. These findings suggest that the unique institutional features of the markets involved play an important role in shaping foreign investment and cross-country arbitrage.     

Spillovers among sovereign CDS,stock and commodity markets: A correlation network perspective

In the wake of the globalization of financial markets, studying spillovers among different asset markets, especially spillovers that include sovereign CDS markets, is of vital importance. This paper attempts to build a spillover network to investigate the complex interactions within the system of sovereign CDS, stock and commodity markets by adopting the spillover index based on forecast error variance (FEV) decomposition. The results reveal that emerging countries have larger average spillovers than developed countries with regard to sovereign CDS-to-stock returns spillovers, while the developed countries contribute more average spillovers than the emerging countries in the opposite direction. Moreover, the sovereign CDS market and the commodity market still demonstrate a relatively important role during certain periods although stock markets always occupy the dominant position during every phase. Our findings provide new insights into spillovers among the major global asset markets using a network perspective, which is valuable for regulation of financial markets, asset allocation and portfolio risk management.     

Institutional investors: Arbitrageurs or rational trend chasers

This paper studies the relationship between institutional investor holdings and stock misvaluation in the U.S. between 1980 and 2010. I find that institutional investors overweigh overvalued and underweigh undervalued stocks in their portfolio, taking the market portfolio as a benchmark. Cross-sectionally, institutional investors hold more overvalued stocks than undervalued stocks. The time-series studies also show that institutional ownership of overvalued portfolios increases as the portfolios' degree of overvaluation. As an investment strategy, institutional investors' ride of stock misvaluation is neither driven by the fund flows from individual investors into institutions, nor industry-specific. Consistent with the agency problem explanation, investment companies and independent investment advisors have a higher tendency to ride stock misvaluation than other institutions. There is weak evidence that institutional investors make a profit by riding stock misvaluation. My findings challenge the models that view individual investors as noise traders and disregard the role of institutional investors in stock market misvaluation.     

Cross-border interbank networks,banking risk and contagion

Recent events have highlighted the role of cross-border linkages between banking systems in transmitting local developments across national borders. This paper analyzes whether international linkages in interbank markets affect the stability of interconnected banking systems and channel financial distress within a network consisting of banking systems of the main advanced countries for the period 1994–2012. Methodologically, I use a spatial modeling approach to test for spillovers in cross-border interbank markets. The results suggest that foreign exposures in banking play a significant role in channeling banking risk: I find that countries that are linked through foreign borrowing or lending positions to more stable banking systems abroad are significantly affected by positive spillover effects. From a policy point of view, this implies that in stable times, linkages in the banking system can be beneficial, while they have to be taken with caution in times of financial turmoil affecting the whole system.     

Price Comovement and Institutional Performance Following Large Market Movements

This paper investigates the price comovement of stocks actively traded by institutions and the investment performance of foreign and domestic institutional investors in Taiwan's stock markets during periods of large market movements. Stocks of small size, high share turnover, and high return volatility tend to move together with the market when markets rise sharply. In short-term holdings, foreign investors and domestic mutual funds can outperform the market by trading small-size, high-turnover, and high-volatility stocks.     

The rise in comovement across national stock markets: market integration or IT bubble?

A stylized fact in the portfolio diversification literature is that diversifying across countries is more effective than diversifying across industries in terms of risk reduction. But with the rise in comovement across national stock markets since the mid-1990s, this no longer appears to be true. We explore if this change is driven by global integration and therefore likely to be permanent, or if it is a temporary phenomenon associated with the recent stock market bubble. Our results point to the latter hypothesis. In the aftermath of the bubble, diversifying across countries may therefore still be effective in reducing portfolio risk.     

Does economic policy uncertainty affect cross-border M&As? —— A data analysis based on Chinese multinational enterprises

This paper analyzes the impact of economic policy uncertainty (EPU) of home and host countries on cross-border mergers and acquisitions (M&As) using EPU indexes and the amount and quantity of China's cross-border M&As in 21 countries from 2001 to 2017. First, we find that uncertainty in the economic policy of the home country drives cross-border M&As, uncertainty in the host country's economic policy significantly inhibits cross-border M&As, and when the economy is in a pro-cyclical period, alleviates the influence of the host country's economic policy uncertainty on M&As. Second, the impact of the host country's economic policy uncertainty on cross-border M&As differs before and after the financial crisis. The host country's economic policy uncertainty is positively correlated with cross-border M&As before the crisis and significantly negatively correlated with it after the crisis. Third, the impact of economic policy uncertainty in the home and host countries on cross-border M&as is significant in developed countries but not significant in developing countries finally, differences in bilateral uncertainty and bilateral market growth are significantly positively correlated with the scale of M&A     

跨境金融:驱动因素、结构特征与未来路径

跨境金融的驱动因素和结构特征是理论界和实务界关注的重要话题。在当前复杂的国际经济金融形势下,厘清全球跨境金融的规律特征,对我国更好地利用“两个市场、两种资源”,防范外部金融风险具有重要意义。2008年国际金融危机以来,在经济周期、全球流动性、金融结构和监管政策等驱动因素的影响下,全球跨境金融活动呈现规模下降、结构调整、流向分化、主体切换和风险变化等特征。同时,银行跨境业务呈现综合化趋势,数字化转型提速,经营稳健性明显增强。我国跨境金融规模稳步增长,对国际收支的影响持续增强,在全球资金循环中的份额不断提高。未来,随着我国经济转型和对外开放步伐的加快,跨境金融的规模和结构还将发生深刻变化,风险日趋复杂。应引导形成与我国经济金融发展特征相匹配的跨境资金结构,平衡扩大开放与风险防控的关系,充分发挥银行业在跨境金融领域的“比较优势”。     

A unique view of hedge fund derivatives usage: Safeguard or speculation?

We study the common equity and equity option positions of hedge fund investment advisors over the 1999–2006 period. We find that hedge funds' stock positions predict future returns and that option positions predict both volatility and returns on the underlying stock. A quarterly tracking portfolio of stocks based on publicly observable hedge fund option holdings earns abnormal returns of 1.55% through the end of the quarter. Net of fees, hedge funds using options deliver higher benchmark-adjusted portfolio returns and lower risk than nonusers. The results suggest that hedge fund positions reflect significant timing and selectivity skill.     

Trading of foreign investors and stock returns in an emerging market - Evidence from Vietnam

This article investigates the impact of foreign investors' trading on stock returns in Vietnam, a key emerging market. We utilize a time series data set of foreign investors' trading volume and market returns of the Ho Chi Minh City stock exchange over an extended time frame before and after global financial crisis. The results indicate that foreign investors are positive feedback traders in Vietnam stock market. The findings also reveal the timing ability and trading strategy of foreign investors. The paper offers strong implications for market participants and portfolio investment.     

Foreign exchange market return spillovers and connectedness among African countries

This paper examines the foreign exchange return shock spillovers and network connectedness among African countries during crisis periods using (Diebold & Yilmaz, 2012; 2014; 2016) which is based on generalized VAR and network theory between June 2004 and June 2021. Overall, the study found a low system-wide spillover connectedness among African foreign exchange markets. However, the total systemic spillover index increased during the eurozone sovereign debt crisis followed by global financial crisis, indicating evidence of contagion effects. This offers good diversification opportunities in the African currency market during crisis periods. The study also found no significant evidence of spillover effects among African currencies. Nonetheless, the network connectedness analysis found a positive significant pairwise return spillovers from the South African rand, Moroccan dirham and the CFA francs to Botswana pula, and from Moroccan dirham to CFA francs and South African rand. Furthermore, the study found South African rand, Moroccan dirham and CFA francs as the most significant net-transmitter of return shocks to other currencies whiles the Kenyan shilling and Botswana pula are the net-receivers of return shocks from other currencies. These results have implications for African central banks interventions in stabilizing their exchange rates to facilitate intra and inter-African trade and for international portfolio investors in managing their foreign exchange risk exposures.     

Joint dynamics of foreign exchange and stock markets in emerging Europe

This paper proposes an ideal specification for studying joint dynamics of emerging stock and foreign exchange markets, and applies it on European emerging markets where this interaction is of particular significance due to large external deficits. Results show that global developed and emerging stock market returns account for a large proportion of the (permanent) comovement between the stock index and currency value. The residual interaction after controlling for global indexes is small. The sign of the currency-stock market relationship is driven by dependence on foreign capital (predominantly positive for countries which are net receivers of foreign portfolio capital) and depth of the local stock market. Bank of Russia's intensive involvement in the currency market delays Ruble's response to global information. Emerging European currencies predict reversals in global equity indexes several months ahead.     

The dark side of global integration: Increasing tail dependence

We measure stock market coexceedances using the methodology of Cappiello, Gerard and Manganelli (2005, ECB Working Paper 501). This method enables us to measure comovement at each point of the return distribution. First, we construct annual coexceedance probabilities for both lower and upper tail return quantiles using daily data from 1974–2006. Next, we explain these probabilities in a panel gravity model framework. Results show that macroeconomic variables asymmetrically impact stock market comovement across the return distribution. Financial liberalization significantly increases left tail comovement, whereas trade integration significantly increases comovement across all quantiles. Decreasing exchange rate volatility results in increasing lower tail comovement. The introduction of the euro increases comovement across the entire return distribution, thereby significantly reducing the benefits of portfolio diversification within the euro area.     

The determinants of the volatility of returns on cross-border asset holdings

Using both panel and cross-sectional models for 28 industrialized countries observed from 2001–2009, we report a number of findings regarding the determinants of the volatility of returns on cross-border asset holdings (i.e., equity and debt). Greater portfolio concentration and an increase in assets held in emerging markets lead to an elevation in earning volatility, whereas more financial integration and a greater share held in Organization for Economic Cooperation and Development countries and by the household sector cause a reduction in the return volatility. Larger asset holdings by offshore financial corporations and non-bank financial institutions cause higher market volatility, although they affect volatility in the equity and bond markets in the opposite way. Overall, both panel and cross-sectional estimations provide very similar results (albeit of different magnitude) and are robust to the endogeneity problem.