Financial globalization, financial crises and contagion

Two observations suggest that financial globalization played an important role in the recent financial crisis. First, more than half of the rise in net borrowing of the U.S. non-financial sectors since the mid-1980s has been financed by foreign lending. Second, the collapse of the U.S. housing and mortgage-backed-securities markets had worldwide effects on financial institutions and asset markets. Using an open-economy model where financial intermediaries play a central role, we show that financial integration leads to a sharp rise in net credit in the most financially developed country and to large asset price spillovers of country-specific shocks to bank capital. The impacts of these shocks on asset prices are amplified by bank capital requirements based on mark-to-market.     

Risk and Structural Instability in US House Prices

This paper employs a Component GARCH in Mean model to show that house prices across a number of major US cities between 1987 and 2009 have displayed asset market properties in terms of both risk-return relationships and asymmetric adjustment to shocks. In addition, tests for structural breaks in the mean and variance indicate structural instability across the data range. Multiple breaks are identified across all cities, particularly for the early 1990s and during the post-2007 financial crisis as housing has become an increasingly risky asset. Estimating the models over the individual sub-samples suggests that over the last 20 years the financial sector has increasingly failed to account for the levels of risk associated with real estate markets. This result has possible implications for the way in which financial institutions should be regulated in the future.     

Capital inflows and asset prices: Evidence from emerging Asia

The withdrawal of foreign capital from emerging countries at the height of the recent financial crisis and its quick return sparked a debate about the impact of capital flow surges on asset markets. This paper addresses the response of property prices to an inflow of foreign capital. For that purpose we estimate a panel VAR on a set of Asian emerging market economies, for which the waves of inflows were particularly pronounced, and identify capital inflow shocks based on sign restrictions. Our results suggest that capital inflow shocks have a significant effect on the appreciation of house prices and equity prices. Capital inflow shocks account for – roughly – twice the portion of overall house price changes they explain in OECD countries. We also address cross-country differences in the house price responses to shocks, which are most likely due to differences in the monetary policy response to capital inflows.     

The effect of financial market development on bank risk: evidence from Southeast Asian countries

This paper examines how bank risk varies with changes in financial markets development in a broad data set of 52 publicly listed commercial banks in five Southeast Asian countries over a 23-year period between 1990 and 2012. A consequence of two financial crises (i.e. the Asian financial crisis of 1997–1998 and the global financial crisis of 2007–2009) provides a natural experiment in which linkages between financial markets development and bank risk are measured. Empirical results show that higher degrees of financial markets development are associated with weaker bank capital positions and are positively related to higher degrees of bank revenue diversification. There is also evidence for a U-shaped relationship between the degree of financial markets development and bank capital.     

Liquidity risk and stock performance during the financial crisis

We investigate whether and how ex-ante liquidity risk affects realized stock returns during the global financial crisis of 2008–2009 in international equity markets. We find that stocks with higher pre-crisis return exposure to global market liquidity shocks experience larger price reductions during the crisis period. Our findings provide further insight into the comprehensive picture of the effect of liquidity risk on asset prices, especially in an international context and under different market conditions.     

Oil price dynamics,macro-finance interactions and the role of financial speculation

What is the role of financial speculation in determining the real oil price? We find that while macroeconomic shocks have been the main real oil price upward driver since mid-1980s, financial shocks have sizably contributed since early 2000s as well, and at a much larger extent since mid-2000s. Even though financial shocks contribute 44% out of the 65% real oil price increase over the period 2004–2010, the third oil price shock is a macro-finance episode: macroeconomic shocks actually largely account for the 2007–2008 oil price swing. While we then find support to the demand side view of real oil price determination, we however also find a much larger role for financial shocks than previously noted in the literature.     

Global financial shocks and foreign asset repatriation: Do local investors play a stabilizing role?

We study the dynamic response of gross capital flows in emerging market economies to different global financial shocks, using a panel vector-autoregressive (PVAR) approach. Our focus lies primarily on the potentially stabilizing role played by domestic investors in offsetting the response of foreign investors to adverse global shocks. We find that, while foreign investors tend to retrench from emerging markets in response to global risk aversion and monetary policy shocks, foreign asset repatriation by resident investors does not always follow suit. Local investors play a meaningful stabilizing role in the face of global risk aversion shocks, with sizeable asset repatriation largely offsetting the retrenchment of non-residents. In contrast, foreign investor retrenchment in response to global monetary policy shocks is not mirrored by asset repatriation. Finally, we find robust evidence that positive global real shocks tend to have a positive impact on net capital inflows to emerging markets. Our results shed light on the likely impact of the Fed's QE tapering on capital flows to emerging market economies.     

International financial spillovers to emerging market economies: How important are economic fundamentals?

We assess the importance of economic fundamentals in the transmission of international shocks to financial markets in various emerging market economies (EMEs), covering the so-called taper-tantrum episode of 2013 and seven other episodes of severe EME-wide financial stress since the mid-1990s. Cross-country regressions lead us to the following results: (1) EMEs with relatively better economic fundamentals suffered less deterioration in financial markets during the 2013 taper-tantrum episode. (2) Differentiation among EMEs set in relatively early and persisted through this episode. (3) During the taper tantrum, while controlling for the EMEs’ economic fundamentals, financial conditions also deteriorated more in those EMEs that had earlier experienced larger private capital inflows and greater exchange rate appreciation. (4) During the EME crises of the 1990s and early 2000s, we find little evidence of investor differentiation across EMEs being explained by differences in their relative vulnerabilities. (5) However, differentiation across EMEs based on fundamentals does not appear to be unique to the 2013 episode; it also occurred during the global financial crisis of 2008 and, subsequently, during financial stress episodes related to the European sovereign crisis in 2011 and China’s financial market stresses in 2015.     

Time-varying impacts of demand and supply oil shocks on correlations between crude oil prices and stock markets indices

This paper investigates the time-varying impacts of demand and supply oil shocks on correlations between changes in crude oil prices and stock markets returns. The findings, obtained by means of a DCC-GARCH from June 2006 to June 2016, indicate that demand shocks positively affected the correlations between crude oil prices and stock market returns from late 2007 to mid-2008, during the apex of the financial markets volatility; from early 2009 to mid-2013, during global economy recovery from the financial crisis; and after 2015, when uncertainties about the Chinese growth and the US economy upturning arose. The dynamic conditional correlation, obtained after the removal of demand shocks effects, presented an average value of 0.13 when all economy sectors were considered and of 0.03 when the energy sector returns were excluded from the stock index. These correlations, still positive on average, suggest that exogenous supply oil shocks had little impact on US mainly enterprises cash flows over the last 10 years. Exceptions are the periods from 2006 to financial crisis and from 2014 until April 2016, when significant and unpredicted changes in oil market happened, considerably affecting the value of the main US companies.     

Capital inflows,monetary policy,and financial imbalances

Ahead of the global financial crisis, financial imbalances built up across advanced economies as credit grew and was increasingly funded in wholesale financial markets. This paper investigates empirically three potential drivers of the build-up of these financial imbalances: rising global imbalances (capital flows); loose monetary policy; and inadequate supervision and regulation. We perform panel data regressions for OECD countries from 1999 to 2007 to explore the relative importance of these factors. We find that differences in the build-up of wholesale-funded credit were driven by the strength of capital inflows. Moreover, we document an interaction effect, whereby the effect of inflows on the build-up was amplified where the supervisory and regulatory environment was relatively weak. In contrast, differences in monetary policy did not significantly affect differences across countries in the build-up of these financial imbalances ahead of the crisis.     

The global financial crisis: Causes,threats and opportunities. Introduction and overview

This essay introduces the papers presented at a conference held in April 2009 on the global financial crisis. The issue begins with four articles that survey the key events and analyze important issues around the crisis from the context of four asset classes: the equity market, fixed income market, foreign exchange market, and emerging markets. The goal is to provide readers with a reference source for understanding what happened in each asset class, when and why it happened, and the consequences. The second group of papers provides in-depth analysis of specific aspects of the crisis. These studies include issues such as the FX carry trade, macro shocks and capital flows, Taylor rules in a low-inflation environment, and the credit boom that preceded the crisis.     

Understanding the financial crisis in Asia

The financial crisis of East Asia in 1997 was largely unanticipated and was characterized by sharp falls in asset prices and currency values in several countries simultaneously. Many empirical models have been developed to predict the occurrence of such crisis. However, the out-of-sample performance of these models is disappointing. Most theoretical explanations of the crisis emphasize the role of banking sector and revolve around models of moral hazard or self-fulfilling runs on liquidity. Empirical tests of the models are, however, rare. Much work remains to be done to explain the contagion, and the effects of equity capital flows.     

Financial flexibility,corporate investment and performance: evidence from financial crises

This study examines the impact of financial flexibility on the investment and performance of East Asian firms over the period 1994–2009. We employ a sample of 1,068 firms and place particular emphasis on the periods of the Asian crisis (1997–1998) and the recent credit crisis (2007–2009). The results show that firms can attain financial flexibility, primarily through conservative leverage policies and less commonly by holding large cash balances. Financial flexibility appears to be an important determinant of investment and performance, mainly during the Asian 1997–1998 crisis. In particular, firms that are financially flexible prior to this crisis (1) have a greater ability to take investment opportunities, (2) rely much less on the availability of internal funds to invest, and (3) perform better than less flexible firms during the crisis. Our analysis covering the credit crisis period of 2007–2009 suggests that some of the advantages of flexible firms towards investing persist but are significantly less pronounced over that period. We also find that the value of financial flexibility is region/country specific, which may be explained by the fact that different regions/countries often adopt different macroeconomic policies and operate in diverse economic/legal environments.     

Financial instruments,financial reporting,and financial stability

I review new empirical evidence from the recent financial crisis on the relation between financial reporting and financial stability. I draw the following conclusions: First, there is still no evidence that fair value accounting caused widespread fire sales of asset or contagion. Second, the empirical evidence suggests that accounting and regulation might have contributed to the crisis by allowing several banks to delay actions. Third, even if share prices reacted positively to the relaxation of fair value accounting rules during the crisis, the origin of the problem might be lax rules that allowed banks to run into financial and regulatory problems. Fourth, fair values can be relevant for assets that a bank intends to hold until maturity if that bank strongly relies on short-term financing. Fifth, the recognition of fair values is no substitute for information that allows investors to judge a bank's risk exposure and the validity of reported fair values.     

Organizational structure,risk-based capital requirements,and the sales of downgraded bonds

Using bond downgrades as external shocks to life insurers’ asset risk, we document several findings of the impact of organizational structure and risk factors on investment risk taking. First, we find that mutual insurers and widely-held stock insurers are more likely to sell downgraded bonds than are closely-held stock insurers. Second, we find evidence that insurers are less likely to sell downgraded bonds that remain in the same rating class than bonds downgraded to a lower rating class. The result implies that insurers sell downgraded bonds mainly because of additional capital charge is imposed, not because of downgrade itself. In other words, risk factors in risk-based capital regulation do matter on life insurers’ investment risk taking. Finally, we find that life insurers might be reluctant to sell downgraded bonds at fire-sale prices during the 2008–2009 financial crisis.     

Global financial crisis and emerging stock market contagion: A volatility impulse response function approach

By employing the volatility impulse response (VIRF) approach, this paper presents a general framework for addressing the extent of contagion effects between the BRICSs’ and U.S. stock markets and how the BRICSs’ stock markets have been influenced in the context of the 2007–2009 global financial crisis. Our empirical results show during the period of 2007–2009 global financial crisis, there are significant contagion effects from the U.S. to the BRICSs’ stock markets. Yet, the degree of stock market reactions to such shocks differs from one market to another, depending on the level of integration with the international economy. Besides, the strengthened degree of stock market integration among the U.S. and BRICS has adverse effect such that if the 2007–2009 global financial crisis occurs today it may result in heavier impact on stock market volatility nowadays compared to the crisis-era.     

Asset price dynamics,inflation and sectoral composition of output: a dependent economy model

This article develops a dependent economy model that focuses on the interactions between inflation and asset price dynamics under a flexible exchange rate and rational expectation. We assume that money wage adjusts instantaneously to clear the labour market. The asset prices are represented by the Tobin’s q and exchange rate. Using this framework, we will examine implications of monetary policy, fiscal policy, tariff liberalization and exogenous capital flows for inflation and asset prices, which in turn determine the allocation of labour and the sectoral composition of output. The effects of different exogenous and policy-induced shocks critically depend on the difference in the speeds of adjustment in commodity price and asset prices and multiple cross effects generated by changes in these prices.     

内外部金融周期差异如何影响中国跨境资本流动?

本文揭示了内外部金融周期差异影响跨境资本流动的机制,并以美国为外部经济代表,基于1998年第一季度至2018年第一季度数据进行了实证检验。研究发现:(1)中国跨境资本流动波动主要来自短期资本流动波动;分类看,其他投资波动较大;方向上看,流入波动要大于流出波动。(2)利差、汇差、资产价差(股指变动差异和房价变动差异)是影响跨境资本流动的重要因素,汇差和资产价差对短期资本流动影响尤甚。(3)内外部金融周期差异变动对资本流入的影响比对资本流出的影响更明显。(4)近年来,利差对跨境资本流动影响减弱,汇差和资产价差对跨境资本流动影响增强。结果说明,防范跨境资本流动风险要关注其他投资资本流动大幅波动风险,同时注意防范汇率和资产价格波动共振对跨境资本流动的冲击。     

Financial crises,price discovery,and information transmission: a high-frequency perspective

This paper examines the price discovery processes before and during the 2007–2009 subprime and financial crisis, as well as the subsequent European sovereign crisis, for American and German stock and bond markets, as well as for U.S. Dollar/Euro FX. Based on 5-s intervals, we analyze how asset prices interact conditional on macroeconomic announcements from the USA and Germany. Our results show significant co-movement and spillover effects in returns and volatility, reflecting systematic information transmission mechanisms among asset markets. We document strong state dependence with a substantial increase in inter-asset spillovers and feedback effects during times of crisis.     

International capital flows and the boom-bust cycle in Spain

We study the joint dynamics of foreign capital flows and real activity during the recent boom-bust cycle of the Spanish economy, using a three-country New Keynesian model with credit-constrained households and firms, a construction sector and a government. We estimate the model using 1995Q1-2013Q2 data for Spain, the rest of the Euro Area (REA) and the rest of the world. We show that falling risk premia on Spanish housing and non-residential capital, a loosening of collateral constraints for Spanish households and firms, as well as a fall in the interest rate spread between Spain and the REA fuelled the Spanish output boom and the persistent rise in foreign capital flows to Spain, before the global financial crisis. During and after the global financial crisis, falling house prices, and a tightening of collateral constraints for Spanish borrowers contributed to a sharp reduction in capital inflows, and to the persistent slump in Spanish real activity. The credit crunch was especially pronounced for Spanish households; firm credit constraints tightened later and more gradually, and contributed much less to the slump.