Estimating time-varying currency betas with contagion: New evidence from developed and emerging financial markets

This paper examines the conditional time-varying currency betas from five developed and six emerging financial markets with contagion and spillover effects. We employ a trivariate asymmetric BEKK-type GARCH-in-Mean (MGARCH-M) approach to estimate the time-varying conditional variance and covariance of returns of stock market index, the world market portfolio and bilateral exchange rate between the US dollar and the local currency. The results show that the world market and currency risks are not only priced in the stock markets, but also time-varying. It is found that currency betas are much more volatile than the world market betas, and currency betas in the emerging markets are more volatile than those in the developed markets. We find empirical evidence of contagion effect and spillovers between stock market and foreign exchange market during the recent global financial crisis, and the effect is stronger in the emerging markets than that in the developed markets. Two applications are provided to illustrate the usefulness of time-varying currency betas.     

Japanese repo and call markets before,during, and emerging from the financial crisis

We empirically investigate the relationship between the Japanese general collateral (GC) repurchase agreement (repo) and uncollateralized call rates before, during, and emerging from the recent financial crisis. Unlike the US and many other countries, the Japanese GC repo rate had been higher than the uncollateralized call rate, despite the former being secured by collateral. Moreover, during the financial crisis, the Japanese GC repo rate rose, whereas the US Treasury GC repo rate decreased. The results of our empirical analysis suggest that segmentation between the Japanese repo and call markets was an important factor in explaining these features. Our results also imply that the Bank of Japan’s policy actions during and after the financial crisis were effective to some extent in lowering both the repo and call rates, and stabilizing the relationship between them.     

新兴市场国家金融危机原因浅析

新兴市场国家经济在过去的20年里取得了举世瞩目的成就,但自20世纪90年代开始,其却频频受到金融危机的冲击:1994年的墨西哥危机、1997年的东南亚危机、1998年的俄罗斯危机、2001年的阿根廷危机。这反映了新兴市场国家在金融全球化进程中的脆弱性。本文主要详细分析新兴市场国     

Policy rate pass-through and the adjustment of retail interest rates: Empirical evidence from Malaysian financial institutions

The paper examines the interest rate pass-through from money market rates to various retail rates in Malaysia within the framework of an error-correction model. We estimate the short- and long-run interest rate pass-through and analyse the asymmetric behaviour of financial institutions under different monetary regimes. The results show that both deposit and lending rate pass-throughs are incomplete. However, pass-through and speed of adjustment vary across financial institutions and retail rates. This analysis also shows that interest rate adjustments are asymmetric, with more significant adjustments taking place under monetary easing than under monetary tightening. These results provide support for the existence of the interest rate channel of monetary policy in Malaysia. There is thus a need to conduct effective monetary operations to support efficient monetary transmission in Malaysia.     

Lessons of the crisis for emerging markets

This paper analyzes the impact of the global financial crisis on emerging markets. It argues that the crisis will have enduring implications for policy toward the development and liberalization of financial markets. In particular, emerging markets will rely (even) less on external finance and adopt a less permissive approach to foreign bank presence. In contrast, the crisis will have a much more limited impact on other aspects of globalization. More controversially, the paper argues that the crisis is unlikely to have a major impact on the structure of the international monetary system.     

The dynamic effects of shocks to labour markets: evidence from OECD countries

This paper uses a set of plausible long-run identifying restrictionson a three-variable system, including output growth, real wagegrowth, and the unemployment rate, to isolate three independentstructural shocks which drive fluctuations in those variablesin a sample of 16 OECD countries during 1950-96. These shocksare interpreted as aggregate demand, productivity, and laboursupply disturbances. As a by-product of the previous analysis,the cyclical behaviour of real wages in response to a demandshock is re-examined and two indices of real wage rigidity arederived.     

The role of banks in financial integration: evidence from new EU members

EU enlargement involves the simultaneous liberalisation of goods and financial markets. While the issue of free trade in capital versus goods has frequently been the subject of study in international economics, the emphasis has typically been on physical capital (machines etc) rather than financial capital. This paper considers this distinction in a world with asymmetric information, moral hazard and hence credit rationing, and explores the resulting ambiguous theoretical predictions via an econometric analysis of the entry of the Central and Eastern European Countries to the EU.     

Financial markets and the current account: emerging Europe versus emerging Asia

Financial globalisation has been associated with divergent current account patterns in emerging markets. In this paper we test for the relevance of financial market characteristics in explaining different current account patterns in emerging Europe and emerging Asia. We find that better developed and more integrated financial markets increase emerging markets’ ability to borrow abroad. The degree of financial integration within the convergence clubs as well as the extent of reserve accumulation are found to be the most significant factors to explain divergent current account patterns in emerging Europe and emerging Asia.     

Contagion in the stock markets: The Asian financial crisis revisited

This paper presents empirical evidence of herding contagion in the stock markets during the 1997 Asian financial crisis, above and beyond macroeconomic fundamental driven co-movements. We analyze the cross-country time-varying correlation coefficients among the stock prices for the countries of Thailand, Malaysia, Indonesia, Korea, and the Philippines, between crisis and tranquil periods. Macromodels are constructed and implemented to capture the pure contagion effects on the markets. After controlling for the economic fundamentals for the five countries, the paper finds strong evidence of herding contagion.     

Exchange-rate regimes for emerging markets: moral hazard and international overborrowing

This paper investigates the role of the exchange-rate regimein a simple Fisherian model of the overborrowing syndrome. Wheredomestic banks are subject to moral hazard, the choice of exchange-rateregime may have important implications for the macroeconomicstability of the economy. Banks that enjoy government guaranteeshave an incentive to increase foreign borrowing and incur foreign-exchangerisks that are underwritten by the deposit insurance system.In the absence of capital controls, this increases the magnitudeof overborrowing and leaves the economy both more vulnerableto speculative attack and more exposed to the real economicconsequences of such an attack. While 'bad' exchange-rate pegswill tend to exacerbate the problem of overborrowing in emergingmarkets, it is unclear that flexible exchange rate always dominatesfixed exchange rates. A 'good fix' - one that is credible andclose to purchasing power parity - may reduce the 'super riskpremium' in domestic interest rates and thereby narrow the marginof temptation for banks to overborrow internationally. Contraryto the current consensus regarding the lessons that should bedrawn from the Asian crisis, a good fix may better stabilizethe domestic economy while limiting moral hazard in the bankingsystem.     

Prospects for integration of financial markets in CIS countries

This article deals with macroeconomic preconditions for financial integration and strengthening the role of the ruble in the post-Soviet space. Particular attention is paid to the developmental priorities of stock markets and the interaction of the CIS exchanges. The integration of the financial infrastructure, the implementation of cross-border payments in national currencies, stock market development, and the growth of investment activity in CIS countries are important areas of integration processes and dealing with the crisis.     

The integration of National financial markets: A review of theory and findings

Zusammenfassung Die Integration nationaler Finanzm?rkte. Ein überblick über Theorie und Beobachtungen. — Dieser Aufsatz bewertet das Ausma der monet?ren und finanziellen Integration unter zwei Aspekten. In den beiden ersten Abschnitten werden Studien analysiert, die sich mit der empirischen Bedeutung von Transaktionskosten und Wechselkursrisiken besch?ftigen, Faktoren, die nationale Geldm?rkte segmentieren k?nnen. In den letzten beiden Abschnitten wird dagegen untersucht, ob die Studien, die Zins?nderungen, Aktienkurse und Kapitalstr?me einbeziehen, st?rker mit der Annahme konsistent sind, da\ die Kapitalm?rkte integriert sind, oder mit der Annahme, da\ sie segmentiert sind. Weder die Studien über das Ausma\ der Kapitalmarktintegration noch die Studien über Transaktionskosten und Wechselkursrisiken führen zu Ergebnissen, die mit der Annahme vereinbar sind, inl?ndische und ausl?ndische Aktiva seien vollst?ndig substituierbar. Keine stützt die Behauptung, es g?be keinen Raum für monet?re Unabh?ngigkeit. Alle sind mit der Ansicht vereinbar, da\ die M?rkte verbunden und ?hnlichen Kr?ften unterworfen sind, aber diese Folgerung schlie\t nicht aus, da\ es Raum für nationale W?hrungspolitik gibt. Die Folgerung, da\ es bis jetzt noch keine Beobachtungen gibt, die mit der Small-country-Annahme konsistent sind, bedeutet nicht, da\ es keine Gründe für eine monet?re Integration gibt, aber sie deutet darauf hin, da\ eine ?konomische Begründung für die monet?re Integration weitgehend mit den Kosten argumentieren mu\, die durch eine nationale Segmentierung der Kapitalm?rkte entstehen.

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Résumé L’intégration des marchés nationaux financiers: une revue de la théorie et des résultats. — Cet article évalue le cadre de l’intégration monétaire et financière de deux points de vue. Les deux premières sections considèrent les études qui s’occupent de la signification empirique de deux facteurs, les frais de transaction et la risque de taux de change, qui pourraient segmenter les marchés nationaux d’argent. Les dernières deux sections, en contraste, considèrent si les études qui incluent les changes des taux d’intérêt, les prix des obligations et les flux des capitaux, sont presque plus consistantes avec la proposition que les marchés nationaux des capitaux sont intégrés ou avec la proposition que les marchés des capitaux sont segmentés. Ni les études sur le cadre de l’intégration de marché financier ni les études sur les frais de transaction et la risque de taux de change ne conduisent aux conclusions qui sont comparables avec la supposition de la substitutionalité parfaite entre les actifs locaux et étrangers. Aucune ne supporte la proposition qu’il n’y a pas de place pour l’indépendance monétaire. Toutes les études sont consistantes avec la vue que les marchés sont reliés et soumis aux forces similaires mais cette conclusion ne dénie pas qu’il y aurait quelque place pour une politique monétaire nationale. La conclusion qu’il n’y a pas encore une évidence étant consistante avec la supposition de petit-pays ne veut pas dire qu’il n’y a pas des arguments pour l’intégration monétaire mais elle suggère, selon une argumentation économique, qu’ils probablement basent considérablement sur les frais de segmenter les marchés nationaux des capitaux.

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Resumen La integración de mercados financieros nacionales: una revisión de la teoría y los resultados. — Este artículo evalúa el ámbito de la integración monetaria y financiera desde dos puntos de vista. Las primeras dos secciones consideran estudios que se ocupan de la significación empírica de los factores, costos de transacción y riesgos cambiarios, que pueden segmentar los mercados monetarios nacionales. Las últimas dos secciones consideran en contraste, si los estudios que envuelven cambios en las tasas de interés, precios de equidad y flujos de capital son màs cercanamente consistentes con la proposición que los mercados de capitales nacionales están integrados o con la proposición que ellos están segmentados. Ni los estudios del ámbito de integración de mercados de capital ni los estudios de costos de transacción y riesgos cambiarios llevan a conclusiones que son compatibles con el supuesto de la perfecta sustituibilidad entre activos domésticos y extranjeros. Ninguno da apoyo a la proposición que no hay lugar para una independencia monetaria. Todos son consistentes con la visión que los mercados están conectados y sujetos a fuerzas similares, pero esta conclusión no niega que puede haber algún márgen para una política monetaria nacional. Concluir que todavía no hay ninguna evidencia consistente con el supuesto del país peque?o no significa que no haya un caso para la integración monetaria, sino que sugiere, que si el caso ha de hacerse sobre bases económicas, con gran probabilidad dependerá fuertemente de Ios costos de segmentar los mercados de capitales nacionales.

     

The evolution of commercial banking and financial markets in Taiwan

Over the past five decades, Taiwan has achieved rapid economic development. Correspondingly, Taiwan’s financial system has been gradually transformed from a controlled system into a liberalized one, from a state banking system into a private banking one, and from an inward investment system into an outward investment one. In the financial market, the interest rate and foreign exchange rate have always been completely determined by market forces. As for capital movements, there are no controls on trade-related capital transactions. Only inward investment in stock markets is still subject to a ceiling imposed by the Central Bank. Financial institutions are gradually being liberalized, although the process is rather slow. Many private banks have been established since 1991, creating a competitive situation in the banking sector. Since the financial crisis broke out in East Asia, Taiwan has suffered less from its impact because its economic fundamentals are comparatively sound. However, it will still take a considerable amount of time before Taiwan’s financial system is fully liberalized.     

Impacts of household loan regulation on financial stability: evidence from Korea

The paper examines whether banking regulations and monetary policy contributed to controlling the fragility of household debt in Korea. The results show that housing loan regulations such as debt to income regulation contributed to a lower household debt delinquency ratio. Lowering the target interest rate provided additional stabilisation of the delinquency ratio. It is recommended that the government adopt an appropriate mix of regulation and monetary policy to control household financial fragility. The financial supervisory services need to be involved in managing debt to income regulation and minimising financial instability and financial market distortions. Further, the monetary authority has to adopt a more effective position in controlling the real lending interest rate and the delinquency ratio of household loans. Such a policy mix will improve effectiveness in controlling financial fragility, especially at a time of financial crisis.     

The dynamic contagion of the global financial crisis into Japanese markets

This paper investigates the risk contagion channel of the global financial crisis into Japan using daily data on bond risk premiums for the financial and manufacturing industries from July 18, 2006 to May 25, 2010. We employ a bivariate EGARCH model with the constant exogenous contagion impacts of foreign industries and the time-varying endogenous contagion impacts of domestic industries. We find evidence that: (i) a constant exogenous impact from foreign industries appears in the risk premium for 5-year bonds issued by manufacturing industry firms, and (ii) contagion only exists from the manufacturing industry to the financial industry, and that there is no evidence of any reverse causation, even during the Lehman Brothers shock on September 15, 2008. Thus, in Japan, risk transfers from foreign industries to the domestic manufacturing industry, and thence to the domestic financial industry.