Decomposing financial (in)stability in emerging economies

The analysis of the build-up of risks in emerging economies have traditionally been scarce and focused mostly on external risks, despite the recent substantial development of their financial system. This paper builds an index of financial vulnerabilities tailored to emerging economies, grouping 32 indicators around four poles: valuation and risk appetite, imbalances in the non-financial sector, financial sector vulnerabilities, and global vulnerabilities. It adopts a model-free approach, purposely departing from early warning models or complex econometric constructs, and rely on data made already available by international organisations. Our index of financial vulnerabilities enables a granular mapping of where risk originates and how it spreads to other parts of the financial system. Using various data visualisation tools and benefitting from the flexibility of our index’s methodology, we are able build a narrative of the evolution of financial stability in emerging economies from 2005 to 2015. Finally, we also discuss the relation between our index and both the business cycle (proxied by GDP) and the credit cycle (proxied by the credit-to-GDP gap).     

Can enhancing financial inclusivity lower climate risks by inhibiting carbon emissions? Contextual evidence from emerging economies

Climate change is regarded as a global concern whereby lowering climate risks, especially by curbing greenhouse gas emissions, has become a critically important policy agenda worldwide. Hence, this study assesses whether financial inclusion, alongside energy efficiency improvement, renewable energy use, economic growth, international trade, and urbanization, can mitigate carbon dioxide emissions in 22 emerging economies. Considering the period of analysis from 2008 to 2018 and utilizing econometric methods robust to handling cross-sectionally-dependent, heterogeneous, and endogenous panel data, the findings reveal that financial inclusion is directly associated with higher discharges of carbon dioxide. Contrarily, energy efficiency improvement and higher share of renewable energy in the aggregate energy consumption level inhibit carbon dioxide emissions. Moreover, energy efficiency gains moderate the financial inclusion-emissions nexus by jointly reducing carbon emissions with greater financial inclusivity. Finally, the results indicate that economic growth, international trade, and urbanization trigger climate risks by boosting the emission figures. In light of these findings, several carbon dioxide-mitigating policies are recommended for neutralizing climate risks in emerging countries of concern.     

Does interest rate and its volatility affect banking sector development? Empirical evidence from emerging market economies

This study investigates the relationship between interest rate, interest rate volatility, and banking sector development in 12 emerging market economies located around the world. For this purpose, panel data analysis was conducted using annual data from 1980 to 2014. In parallel to the financial development literature, which asserts that banking sector development, as a broad and complex concept, cannot be measured by a single indicator, this study adopts a set of measures of banking sector development. The empirical results reveal that while interest rate has a positive impact on all banking sector indicators, this relationship weakens at higher interest levels, showing a concave relationship between interest rate and banking sector development. In addition, the empirical results provide evidence that interest rate fluctuations have a negative impact on most banking sector development (BSD) indicators, suggesting that the banking sectors of emerging countries are vulnerable to interest rate risks. Furthermore, all measures of the banking sector indicators are positively affected by economic growth rates, while this association weakens at higher levels of income, confirming a nonlinear relationship. Thus, the results have important implications for policymakers in improving the banking system and promoting the economic growth of these emerging economies.     

An examination of the Vietnamese emerging market economy: understanding how and why auditors have responded to the audit law reforms

Using New Institutional Sociology (NIS), we seek to explain the variation between what was intended with the Vietnamese reforms to audit in 2011 and the actual practice, and why there is variation. This paper reports findings from interviews with 70 individuals representing identified groups of stakeholders in the market for audit and assurance services in Vietnam. Overall, the findings indicate that there still exist business risks for foreign companies that pursue trade and commerce in communist Vietnam, particularly where non‐Big 4 audit firms are involved in the external audit function, as in some cases auditor independence is most likely compromised.     

Credit market imperfections,labor markets,and leverage dynamics in emerging economies

Emerging economies (EMEs) have different credit and labor market structures relative to advanced economies. We document that economies with larger self-employment shares tend to exhibit less countercyclical leverage dynamics. We build a model where formal credit markets, input credit relationships, and the structure of labor markets interact that (1) captures a comprehensive set of EME business cycle regularities and (2) rationalizes our new fact. The interaction between firms’ net worth, interfirm input credit, and self-employment underlying our framework is critical for explaining our fact and is supported by the data.     

Time-varying risk preferences and emerging market co-movements

This paper examines how shocks can transmit across international stock markets through the channel of time-varying investor risk preferences. We highlight the effects of this channel by comparing the conventional constant relative risk aversion utility function with the habit-formation utility function of Campbell and Cochrane (J. Pol. Econ. 107 (1999) 205). Calibrating our model with data from Argentina, Korea and Mexico, we find that in the presence of time-varying investor risk preferences, market integration generates a substantial increase in cross-country co-movements of stock returns.     

Determinants and consequences of voluntary disclosure in an emerging market: Evidence from China

In this paper we examine empirically the determinants of voluntary disclosure in the annual reports of Chinese listed firms that issue both domestic and foreign shares and determine if the cost of debt capital is related to the extent of voluntary disclosure. We find the level of voluntary disclosure is positively related to the proportion of state ownership, foreign ownership, firm performance measured by return on equity, and reputation of the engaged auditor. There is no evidence, however, that companies benefit from extensive voluntary disclosure by having a lower cost of debt capital.     

Stock market cycles, financial liberalization and volatility

In this paper we analyze the cycles of the stock markets in four Latin American and two Asian countries, and we compare their characteristics. We divide our sample in two subperiods in order to account for differences induced by the financial liberalization processes of the early 1990s. We find that cycles in emerging countries tend to have shorter duration and larger amplitude and volatility than in developed countries. However, after financial liberalization Latin American stock markets have behaved more similarly to stock markets in developed countries whereas Asian countries have become more dissimilar. Concordance of cycles across markets has increased significantly over time, especially for Latin American countries after liberalization.     

Assessing the effectiveness of financial reporting harmonization for emerging market banks: The case of Banco Serfin

In the last decade there has been a proliferation of financial crises in emerging markets. To some extent, the suddenness and magnitude of some of these crises have been blamed on poor financial reporting standards for bank loan losses. As a result, prior to providing countries with “financial bailout” funds, international investors and international financial organizations have increasingly required that countries harmonize their bank financial reporting standards with international financial reporting standards.Given this trend, this case requires students to assess the effectiveness of efforts to harmonize loan financial reporting (with International Financial Reporting Standards) for Mexican banks during (and after) the country’s financial crisis of the late 1990s. Students are required to assess the extent to which both pre-crisis standards as well as new, post-crisis standards complied with international financial reporting standards. They are also required to assess the impact of the new standards on the reporting practices for loans of one particularly troubled financial institution. Through the examination of this institution’s accounting practices for loans, students obtain a familiarity of the shortcomings of emerging markets’ banks’ loan financial reporting as well as the factors which influence the adoption of international financial reporting standards by emerging market banks.     

Monetary policy for small emerging market economies: the way forward

Discretionary monetary policy for small emerging market economies, especially in Sub-Saharan Africa, can benefit from closer scrutiny and strengthening through appropriate and incremental policies. Field research and related analysis challenge the conventional wisdom on the relationship between interest rates and inflation. Lessons learned suggest that monetary policy needs to be tempered to prevailing social, cultural, and socio-economic factors. In addition, access to credit through financial inclusion policies and programmes needs to be addressed, and the overarching role of good governance cannot be overlooked. Given the broad scope of weaknesses inherent in monetary policy-making (and the systems that support it) in small emerging market economies such as Botswana's, two options are available to tackle the problems: either monetary union should be adopted or incremental new directions to the status quo are required.     

Government size and economic growth in emerging market economies: a panel co-integration approach

A significant positive influence of both government size and domestic investment on economic growth is found in the long run during 1970–2006 for a sample of 19 emerging market economies, employing panel co-integration testing and estimating the parameters using dynamic ordinary least square method, for all the indicators, excepting the case when one chooses general government final consumption expenditure as a percentage of GDP a measure of government size and gross capital formation as a percentage of GDP a measure of domestic investment, with per capita GDP a proxy for economic growth. The findings corroborate the argument that diverse results of the earlier studies are due to different measures adopted.     

Integration of emerging stock markets with global stock markets

Financial integration for emerging economies should be seen as a long-term objective. In this paper, we examine stock market integration among five selected emerging stock markets (Brazil, China, Mexico, Russia and Turkey) and developed markets of the US, UK and Germany. The bounds testing approach to cointegration and error-correction modeling are used on monthly data from January 2001 to December 2014 to determine the short-run and long-run relationship between emerging stock market returns and the returns of the developed stock markets. The results show evidence of the existence of short-run integration among stock markets in emerging countries and the developed markets. However, the long-run coefficients for stock market returns in all emerging countries show a significant relationship only with Germany stock market return. The empirical findings in this study have important implications for academicians, international investors, and policymakers in emerging markets.     

Testing for financial contagion based on a nonparametric measure of the cross‐market correlation

When contagion is defined as a significant increase in market comovement after a shock to one country, we propose a test for financial contagion based on a nonparametric measure of the cross-market correlation. Monte Carlo simulation studies show that our test has reasonable size and good power to detect financial contagion, and that Forbes and Rigobon's test (2002) is relatively conservative, indicating that their test tends not to find evidence of contagion when it does exist. Applying our test to investigate contagion from the 1997 East Asian crisis and the 2007 Subprime crisis, we find that there existed international financial contagion from the two financial crises.     

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.     

Has financial market integration increased during the nineties?

This paper analyses whether there has been an increase in the degree of financial market integration during the nineties. To do this, we focus on stock markets and compute two alternative measures of market integration based on a refinement of the approach suggested by Chen, Z., Knez, P.J., 1995. [Measurement of market integration and arbitrage, Review of Financial Studies 8(2), 287–325]. The main advantage of this approach is that it relies on the condition of absence of arbitrage opportunities, which is directly related to the idea that more integration means less barriers to trade across markets — and does not depend on any particular asset pricing model. The evidence found suggests that during the nineties there has been an increase of the degree of market integration between stock markets.     

Emerging economies in the 2000s: Real decoupling and financial recoupling

The paper documents an intriguing development in the emerging world in the 2000s: a decoupling from the business cycle of advanced countries, combined with the strengthening of the co-movements in the main emerging market assets that predates the synchronized selloff during the crisis. In addition, the paper tests the hypothesis that financial globalization, to the extent that it creates a common, global investor base for EM, could lead to a tighter asset correlation despite the weaker economic ties. While an examination of the impact of alternative financial globalization proxies yield no conclusive result, a closer look at global emerging market equity and bond funds show that the latter indeed foster financial recoupling during downturns, reflecting the fact that they trade near their respective benchmarks and respond to withdrawals by liquidating holdings across the board.     

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.     

Leading indicators of financial stress: New evidence

This paper examines which variables have predictive power for financial stress in 25 OECD countries, using a recently constructed financial stress index (FSI). First, we employ Bayesian model averaging to identify leading indicators of stress. Next, we use those indicators as explanatory variables in a panel model for all countries and in models at the individual country level. It turns out that panel models can hardly explain FSI dynamics. Although better results are achieved in country models, our findings suggest that (increases in) financial stress is (are) hard to predict out-of-sample despite the reasonably good in-sample performance of the models.     

The effect of financial reporting quality on corporate investment efficiency: Evidence from the Tunisian stock market

Positive Accounting Theory (Watts and Zimmerman, 1978) stipulates that financial reporting has two dimensions: market signaling and monitoring managerial behaviors. Through these signaling and stewardship means, a better financial reporting quality would have significant economic consequences in terms of efficient resources allocation, which results in improving firms’ investment decision. In this paper, we examine the impact of financial reporting quality on corporate investment efficiency. Our sample is based on 25 Tunisian listed companies for the period 1997–2013. The findings confirm that some characteristics of the financial information, namely, reliability and smoothness, appear to increase the investment inefficiency, while others, i.e., conservatism and relevance, seem have no significant effect on investment decisions. We attribute such results mainly to the contextual specificities of the Tunisian environment, such as, the institutional bodies and settings, the cultural values and some characteristics of the corporate governance system.