Asset Fire Sales and Purchases and the International Transmission of Funding Shocks

We identify a new channel for the transmission of shocks across international markets. Investor flows to funds domiciled in developed markets force significant changes in these funds' emerging market portfolio allocations. These forced trades or “fire sales” affect emerging market equity prices, correlations, and betas, and are related to but distinct from effects arising purely from fund holdings or from overlapping ownership of emerging markets in fund portfolios. A simple model and calibration exercise highlight the importance to these findings of “push” effects from funds' domicile countries and “co‐ownership spillover” between markets with overlapping fund ownership.     

Time-varying stock returns and labor income risks in the US and UK

I propose and estimate conditional asset pricing models where the risk premiums of the markets are related to the conditional covariance of the markets with labor income growth within and across countries and the volatility of the markets are related to the shocks and interactions of stock returns and labor income growth. I document that the risk premiums for the US and UK stock markets are more related to the conditional covariance of returns with the labor income growth within countries than across countries. I also find significant interactions of volatilities between stock returns and labor income within countries but not across countries. The results are consistent with the hypothesis that prices of domestic stocks are determined to a greater extent by stochastic discount factors of domestic investors than foreign investors and vice versa.     

The global financial crisis: Explaining cross-country differences in the output impact

What explains differences in the crisis impact across developing countries and emerging markets? Using cross-country regressions to assess the factors driving the growth performance in 2009 (compared to pre-crisis forecasts for that year), we find that a small set of variables explain a large share of the variation in the growth impact. Countries with more leveraged domestic financial systems, stronger credit growth, and more short-term debt tended to suffer a larger effect on economic activity, although the relative importance of these factors differs across country groups. For emerging markets, this financial channel trumps the trade channel. For a broader set of developing countries, however, the trade channel seems to have mattered, with more open countries affected more strongly and those exporting food commodities being less hard hit. Exchange-rate flexibility helped in buffering the impact of the shock, particularly for emerging markets. There is also some evidence that countries with a stronger fiscal position prior to the crisis were impacted less severely. We find little evidence for the importance of other policy variables.     

Asset Prices,News Shocks,and the Trade Balance

We analyze the relationship between asset prices and the trade balance estimating a Bayesian VAR for a broad set of 38 industrialized and emerging market countries. To derive model‐based identifying restrictions, we model asset price shocks as news shocks about future productivity in a two‐country dynamic stochastic general equilibrium model. Such shocks are found to exert sizable effects on the trade balance. Moreover, the effects are highly heterogeneous across countries. For instance, following a news shock that implies on impact a 10% increase in domestic equity prices relative to the rest of the world, the U.S. trade balance will worsen by up to 1.0 percentage points, but much less so for most other economies. We find that this heterogeneity appears to be linked to the financial market depth and equity home bias of countries. Moreover, the channels via wealth effects and via the real exchange rate are important for understanding the heterogeneity in the transmission.     

Bond market integration of emerging economies and bilateral linkages

Although there are numerous studies that have looked at the spillover effects in equity markets, little attention has been paid to explore the integration of bond markets of developed and emerging economies. Our paper is an attempt to fill this void by quantifying the spillovers from developed countries on the bond markets of 25 emerging economies. We apply volatility and return spillover models to quantify the extent of the spillovers from developed markets (i.e. the United States, UK and Japan) into emerging bond markets. We find that the extent of the return spillovers and volatility spillovers has not been symmetric across emerging markets. We explain these differences using bilateral factors such as trade volume, portfolio investment, cultural and geographical factors. The bilateral trade volume turns out to be the leading explanation for the extent of spillovers between our set of countries.     

Pension Funds and Emerging Markets

This paper focuses on the investment behavior of pension funds in developed and emerging market countries. First, it analyzes the main determinants of the emerging market asset allocation of pension funds in developed countries. Second, it assesses how pension funds in emerging markets have contributed to the development of local securities markets. Third, it analyzes the determinants of pension funds' investment performance. The paper concludes with a discussion of why the emerging market asset allocation of pension funds in developed countries is likely to increase and what the challenges faced by pension funds in emerging markets are.     

Return spillovers between white precious metal ETFs: The role of oil,gold, and global equity

This paper investigates the relationship between white precious metals and gold, oil and global equity by means of spillovers and volatility transmission. Relying on the recently introduced ETFs, this study is the first to analyse return spillovers derived from an E-GARCH model and to take into account frequency dynamics to understand changes in connectedness across periods of time. Results uncover numerous channels of return transmission across the selected ETF markets over the last 10years and highlight the role of gold ETFs as the most influential market in the sample. Furthermore, our work provides insights into the characteristics of white precious metal markets using a hidden semi-Markov model. Finally, we argue that even though silver and platinum have gained more importance as investment assets over the last few years, palladium still very much remains an industrial metal.     

Heterogeneity of the determinants of euro-area sovereign bond spreads; what does it tell us about financial stability?

In this paper, we assess the movements of euro area sovereign bond yield spreads vis-à-vis the German Bund as processes specified across different levels of volatility and subject to movements in asset prices and economic conditions. The determinants we use are grouped into domestic and euro-area aggregates, thus allowing us to derive results on their relative explanatory power and compare them across time and the spectrum of countries. We find that volatility influences the deterministic processes of the euro area sovereign spreads and that identical determinants have effects on spreads that vary considerably across countries. Furthermore, we find that variables reflecting investment confidence conditions and perceptions for the upcoming economic activity are significant determinants and their significance remains, to a large extent, even when controlling for fiscal variables.     

Downside and upside risk spillovers between exchange rates and stock prices

We examined downside and upside risk spillovers from exchange rates to stock prices and vice versa for a set of emerging economies. We characterized the dependence structure between currency and stock returns using copulas and computed downside and upside value-at-risk and conditional value-at-risk. We documented a positive relationship between stock prices and currency values in emerging economies with respect to the US dollar and the euro, with downside and upside spillover risk effects transmitted both ways. Finally, we also documented asymmetries in upside and downside risk spillovers and asymmetric differences in the size of risk spillovers when the domestic currency values against the US dollar and the euro. Our results, consistent with flight-to-quality phenomena, have implications for downside and upside risk management of international investor portfolios in emerging markets.     

The determinants of domestic and foreign bond bias

This paper studies the determinants of the domestic and the foreign bond biases and their evolution over time using aggregate bond allocation data from CPIS. Our results show that the home bias is prevalent across all countries, despite the decreasing of the domestic bias in most countries in the 1997–2009 period. We find that the domestic bond bias is lower in countries with higher economic development, higher restrictions on foreign capital transactions, more developed bond markets, higher familiarity, and higher efficiency of the judicial system. When investing overseas, investors also prefer to allocate their investments in countries with higher economic development, lower restrictions on capital flows, more developed bond markets, stronger judicial systems, and higher past returns. Additionally, we find that familiarity (i.e. geographic proximity, common language, and bilateral trade) is a major determinant to decrease the foreign bias. Finally, there is no evidence that investors’ bond allocations are explained by diversification opportunities as proxied by bond markets correlations.     

The value of stock analysts' recommendations: Evidence from emerging markets

This is the first study to empirically examine post-recommendation buy and hold abnormal returns in emerging markets. By analyzing a sample of 13 emerging countries over the decade from 1996 to 2005, we find that stock prices react strongly to stock analyst recommendations and revisions. We also find that there is a stronger positive bias in analyst recommendations and revisions in emerging markets compared with that in developed markets. In our cross-sectional analysis, we find that the Market-to-Book ratio is the primary indicator for Buy and Strong Buy recommendation regressions. This indicates that stock analysts in emerging markets prefer high growth stocks with attractive characteristics.     

Are Open Markets Good for Foreign Investors and Emerging Nations?

Although policymakers of emerging nations routinely brand foreign capital as "hot money" and hold it responsible for the ills of their economies, this article suggests that the experience of opening up their markets to overseas investors has been largely beneficial for the host countries. Based on their own recent study, the authors report that when emerging economies open their markets, the level of stock prices tends to rise without an associated increase in volatility, and more capital becomes available for domestic investment at a lower cost. The stock markets also appear to become more efficient, thus resulting in a better allocation of resources. Furthermore, the inflow of foreign capital does not lead to higher inflation or stronger currencies, nor does the volatility of inflation or exchange rates increase. If some countries experience large capital outflows with damaging consequences, the culprit is not foreign investors, but rather policymakers' futile attempt to defy market forces and the failure of their economies to put the capital to productive uses.
The authors' analysis also suggests that, when the recent turmoil in emerging markets is set in the context of a longer-run historical perspective, nothing appears to have changed that would materially alter the prospects for investing in emerging markets. The recent market volatility and currency crises in emerging nations are by no means extraordinary—indeed, the currencies of many developing countries fall routinely. What distinguishes the Mexican and Thai currency crises from such run-of-the-mill devaluations is that both governments resisted the inevitable until market forces brought about a crash. The recent emerging market currency crises should accordingly be viewed as more or less predictable "road bumps" that can be expected when the policymakers of emerging economies gradually—and grudgingly—relinquish their power to the markets.     

Monetary policy and stock prices – Cross-country evidence from cointegrated VAR models

This study applies the Cointegrated Vector-Autoregressive (CVAR) model to analyze the long-run relationships and short-run dynamics between stock markets and monetary policy across five developed and three emerging economies. Our main aim is to check whether monetary policy plays an important role for stock market developments. As an innovation, monetary policy enters the analysis from three angles: in the form of a broad monetary aggregate, short-term interest rates and net capital flows. Based on this framework, we analyze whether central banks are able to influence stock market developments. Our findings suggest different patterns and causalities for emerging and industrial economies with the stock markets of the former economies more frequently related to monetary aggregates and capital flows. A direct long-run impact from short-term interest rates on stock prices is only observed for 3 out of 8 economies.     

Default Premiums in Commodity Markets: Theory and Evidence

We model the effect of nonperformance risk on forward and futures pricing and look for evidence of nonperformance risk in precious metals futures prices from the “Hunt Brothers”episode. Changes in default premiums are measured and related to the sequence of events in the metals markets during this period. Results suggest first that ex ante costs of nonperformance can be a significant, priced factor in commodity markets and second that the arrival of new information is often associated with changes in these costs. The evidence has implications for both theoretical and empirical research on commodity markets.     

Developed markets’ business cycle dynamics and time-variation in emerging markets’ asset returns

This paper empirically studies the predictability of emerging markets’ stock returns by business cycle variables and the role of developed markets’ business cycle dynamics in this respect. The evidence shows that the link between business cycles and future stock market returns among emerging markets is considerably weaker than among developed markets. By contrast, I find strong evidence of stock return predictability by the respective country’s dividend-price ratio. This latter finding could reflect that variation in dividend-price ratios potentially reflects both the temporary impact of “hot money” inflows on emerging markets’ asset prices and rational expectations of future returns.     

Determinants of International Insurers' Participation in Foreign Non-Life Markets

Mirroring the trend in the broader marketplace, the global insurance industry is steadily moving toward increased liberalization and deregulation. This study seeks to develop the first empirical model that examines the importance of foreign market characteristics as they relate to the participation of international insurers in the non‐life business of those countries. The analysis reveals that market structure is an important factor in determining whether international insurers participate in a given foreign market. In addition, for markets that are not competitive, removing trade barriers would significantly improve the desirability of those countries as host markets. The results also suggest that countries with higher gross domestic product tend to attract more involvement from international insurers. While this research focuses on the markets of industrialized countries, the findings will provide significant implications for those emerging markets that have not yet collected relevant data on a number of the variables included in this study.     

On cross-border bank credit and the U.S. financial crisis transmission to equity markets

This paper examines the role played by cross-border equity, bond and bank credit flows versus international trade in the transmission of the U.S. financial crisis to equity markets worldwide. We estimate vector autoregressive models with exogenous global factors using monthly data on 36 emerging and developed countries. The results from an eclectic methodology that includes causality tests, generalized impulse responses and forecast error variance decompositions indicate that the crisis is mostly transmitted through bank credit rather than portfolio flows and international trade. The results are robust to altering the exogenous versus endogenous vectors of variables, to measuring equity prices in U.S. dollars or local currency, to averaging the data across countries versus averaging the parameters from individual country estimation, and to redefining the start date of the crisis. The findings endorse the use of banking regulation and capital controls as part of the policy toolkit to limit financial vulnerability.     

Brand Equity and Firm Risk: An Empirical Investigation in an Emerging Market

The aim of this article is to investigate the relationship between brand equity and firm risk in Turkey using a sample of 254 firm-year observations for the period 2009–2014. Our findings suggest that brand equity is an important determinant of equity risk in addition to conventional firm-specific variables. In particular, after controlling for firm-specific variables, the results reveal that firms with high brand equity experience lower volatility in stock returns. We also find that enhancing brand equity is an important tool for firms in reducing unsystematic and downside systematic risk in their stock prices. Our findings are robust to different valuation models of domestic and global investors as well as different methods of estimations. The results are encouraging for both marketing managers and investors, particularly those in emerging markets where stock price volatility is relatively higher than in developed markets.     

Global Liquidity,House Prices,and the Macroeconomy: Evidence from Advanced and Emerging Economies

In this paper, we first compare house price cycles in advanced and emerging economies using a new quarterly house price data set covering the period 1990–2012. We find that house prices in emerging economies grow faster, are more volatile, less persistent, and less synchronized across countries than in advanced economies (AEs). We also find that they correlate with capital flows more closely than in AEs. We then condition the analysis on an exogenous change to a particular component of capital flows: global liquidity, broadly understood as a proxy for the international supply of credit. We identify this shock by aggregating bank‐to‐bank cross‐border credit and by using the external instrumental variable approach introduced by Stock and Watson (2012) and Mertens and Ravn (2013). We find that in emerging markets (EMs) a global liquidity shock has a much stronger impact on house prices and consumption than in AEs. We finally show that holding house prices constant in response to this shock tends to dampen its effects on consumption in both AEs and EMs, but possibly through different channels: in AEs by boosting the value of housing collateral and hence supporting domestic borrowing; in EMs, by appreciating the exchange rate and hence supporting the international borrowing capacity of the economy.