The more contagion effect on emerging markets: The evidence of DCC-GARCH model

The paper aims to test the existence of financial contagion between foreign exchange markets of several emerging and developed countries during the U.S. subprime crisis. As a result of DCC-GARCH analysis, we find the evidence of contagion during U.S. subprime crisis for most of the developed and emerging countries. Another finding is that emerging markets seem to be the most influenced by the contagion effects during U.S. subprime crisis. Since financial contagion is important for monetary policy, risk measurement, asset pricing and portfolio allocation, the findings of paper may be interest of policy makers, investors and portfolio managers.     

Political booms and currency crises

This paper shows evidence that political booms, defined as the rise in governments’ popularity, are associated with a higher likelihood of currency crises. The reasoning behind this finding is that prudent economic policies to address underlying weaknesses in the economy may be political costly for incumbent governments in the short-term. Hence, popularity-concerned governments may not have enough incentives to take such corrective actions in a timely manner. This approach, in turn, can deteriorate economic fundamentals and increase related risks in the economy which can eventually lead to crises. This paper sheds light on this phenomenon in the case of currency crises, suggesting that currency crises can be viewed as “political booms gone bust” events. Moreover, it finds that higher international reserves, higher exports, and a higher degree of financial openness alleviate the effect of political booms on currency crises.     

Bank efficiency and industry growth during financial crises

Financial crises pose many problems for growth, and in this time of increasing financial instability it is important to fully understand why this happens. Many papers have analyzed the relationship between growth and a country's level of financial development using private credit, which leads to several unexpected problems. However, very few have used bank efficiency to gauge the development of the financial sector. The aim of this paper is to analyze the effect of bank efficiency on value-added growth of industries that were most dependent on external financing during the financial crisis. Specifically, it uses the data envelopment analysis (DEA) method to measure the efficiency of the banking sector across countries, according to the empirical strategy offered by Rajan and Zingales (1998). Our main result shows that bank efficiency relaxed credit constraints and increased the growth rate for financially dependent industries during the crisis. This finding shows the great but overlooked importance of bank efficiency in mitigating the negative effects of financial crises on growth for industries that are most dependent on external financing.     

Sudden stops and the Mexican wave: Currency crises,capital flow reversals and output loss in emerging markets

Sudden stops are the simultaneous occurrence of a currency/balance of payments crisis with a reversal in capital flows. We investigate whether sudden-stop crises are a unique phenomenon and whether they entail an especially large and abrupt pattern of output collapse (a “Mexican wave”). Using a panel data set over 1975–1997 and covering 24 emerging-market economies, we distinguish between the output effects of currency crises, capital inflow reversals, and sudden-stop crises. Sudden-stop crises have a large negative, but short-lived, impact on output growth over and above that found with currency crises. A currency crisis typically reduces output by about 2–3%, while a sudden stop reduces output by an additional 6–8% in the year of the crisis. The cumulative output loss of a sudden stop is even larger, around 13–15% over a 3-year period. Our model estimates correspond closely to the output dynamics of the ‘Mexican wave’ (such as seen in Mexico in 1995, Turkey in 1994 and elsewhere), and out-of-sample predictions of the model explain well the sudden (and seemingly unexpected) collapse in output associated with the 1997–1998 Asian Crisis.     

The transmission from equity markets to commodity markets in crises periods

This article investigates the transmission from equity markets to commodity markets during two major financial crises, namely the Subprime Mortgage and the Sovereign Debt Crises. We perform an analysis on sub-stages from 3 January 2003 to 31 October 2013 to capture the price behaviour of both equity and commodity markets. Two financial crises indicators, VIX and CDS, are used to represent fear of a crisis. We find that correlations between commodity and equity markets are time-varying and highly volatile during a financial crisis. While sharing some common features, commodities cannot be considered a homogeneous asset class. Segmentation characteristics of commodity markets disappear in times of financial crises, reducing their substitutability as an investment portfolio for asset diversification purposes. Through our test for Granger causality, we find the existence of transmission during a financial crisis. Volatility spillover effect also plays a major role as transmission mechanisms. After the collapse of Lehman Brothers, commodities decoupled from the VIX rather soon, and there is an increase in correlation with the CDS. In addition, we find the decoupling effect of most commodities show insignificant correlations with the Dow Jones, VIX and CDS after the Greek debt restructuring.     

Emerging technologies in emerging markets: Introduction to the special section

Emerging technologies have significant implications and profound consequences for firms, markets, government policy, and society as a whole. In emerging markets, however, social uncertainties are as important as technological and market uncertainties, and moreover are somewhat more complex. The papers in this special section offer views of how these important social uncertainties can be considered concurrently with technological and market uncertainties, particularly because they play a relatively larger role in emerging markets than in more advanced markets.     

Determining demand, supply, and pricing for emerging markets based on disruptive process technologies

A model for forecasting the likely market size and demand for an early-stage emerging process technology is considered. This method takes into account markets, supply, demand, supply/demand gap, pricing, implications to government policy, corporate strategy, and value of intellectual property. For the purpose of illustration, forecasting of microsystems is considered.     

Real estate prices and systemic banking crises

The collapse of real estate prices has historically jeopardized banking stability and triggered systemic banking crises. This paper studies risk contagion in a banking system in real estate price shock by adopting complex network theory. Modelling the real estate-related asset as a common exposure of banks to the real estate market, we propose a model that incorporates two main risk contagion channels, i.e., the financial network and asset fire sales, and reveal how the real estate price shock is transmitted and propagated across banks. We demonstrate that banking stability is highly sensitive to the real estate price shock. Moreover, due to the particularly low liquidity of the real estate market, the asset fire-sales of real estate assets overwhelms the financial network, playing the dominant role in risk contagion. Our model can be adopted by regulators to conduct stress testing and to forge effective risk management strategies.     

Financial crises,exchange rate linkages and uncovered interest parity: Evidence from G7 markets

This paper examines the dynamic linkages among major exchange rates during the Global Financial Crisis and Eurozone Sovereign Debt Crisis. We extend the previous literature on volatility spillover linkages among the currencies by taking into account the uncovered interest-rate parity hypothesis for 2004–2015. The results indicate that the Canadian Dollar and Great British Pound were affected mainly by the US Dollar across the two crises due to strong financial and economic ties among the three economies, while the Japanese Yen shows evidence of a safe-haven currency. We also provide evidence of varying vulnerability of currencies to both crises, implying increased portfolio diversification benefits, since holding a portfolio with diverse currencies is less subject to systematic risk. These results show that the policy makers need to adopt a stricter form of monetary policy coordination among central banks, since the different vulnerability of currencies across turbulent periods reveals possible non-cooperative monetary policies.     

Financial cycles in asset markets and regions

This paper provides a comprehensive analysis of financial cycles in asset markets and regions. Using a large sample of 38 advanced and emerging economies to enable a comparative assessment, the analysis conforms with the prevailing literature pertaining to the characterization of financial cycles in advanced economies, but finds that equity market cycles in emerging market economies (EMEs) in Asia, Latin America, and Eastern Europe may be a more useful gauge of the financial cycle compared to cycles in credit and property markets. Similar to more advanced economies, it is found that financial and business cycles in emerging economies are synchronized, albeit partially and with some cross-country heterogeneity. This underscores the importance for policy makers to be vigilant of interlinkages between real and financial sectors, pointing toward a need for carefully designed macroprudential policies. Finally, it is found that financial cycles in emerging markets remain vulnerable to global risk aversion in financial markets and spillovers from the US, thereby reinforcing the importance of continuing to strengthen domestic macroeconomic fundamentals, and develop further local financial sectors through targeted structural reforms.     

Trade openness,internet finance development and banking sector development in China

This paper investigates the impact of trade openness on Internet finance development in China. Using a unique panel data set for 29 Chinese provinces, we find that trade openness has a positive impact on Internet finance development and is a leading indicator of Internet finance development. Further analyses show that higher trade openness is associated with faster Internet finance development in wealthier provinces. Moreover, we investigate the effect of Internet finance development on the banking sector development. The empirical results suggest that Internet finance development has a positive effect on the banking sector size and efficiency.     

The state of research on technological uncertainties, social uncertainties and emerging markets: A multidisciplinary literature review

The objective of this research work is to study the progress of research on technological uncertainties, social uncertainties and emerging markets and outline and identify the key disciplines, journals, articles and authors. For this the author studied the existing literature from the various fields in which technological uncertainties, social uncertainties and emerging markets research work have been published using ISI Web of Knowledge database. The paper finds that there is increasing research work on technological uncertainties, social uncertainties and emerging markets and the bibliographical search resulted in ninety-one documents written by one-hundred-sixty-one authors in eighty-four journals in seventy-two disciplines. The five major disciplines and their underlying journals are business and economics, agriculture, psychology, public administration, and environmental sciences and ecology accounting for majority of publications. In journals the most prolific, measured by number of articles published are Harvard Business Review, Social Science and Medicine, World Development, and Higher Education; and most influential, measured by the global citation received, are Harvard Business Review, Social Science and Medicine and Sociological Review. The top 10% of the journals are responsible for 23% of all publications but 85% of all global citations received. This highlights that despite the high, diverse and increasing number of journals; only few are dominating and shaping the research arena of technological uncertainties, social uncertainties and emerging markets. Further, in the ten most cited articles, no author appears more than once.     

Financial intermediation and endogenous risk in the banking sector

The paper revisits the impact of uncertainty on the decision problem of a bank. The bank extends risky loans to private investors and sells deposits to savers at fixed rates. The uncertainty under which deposit/loan-portfolios are chosen by banks is endogenized through an information system that conveys public signals about the return distribution of bank loans. Transparency in the banking sector is defined in terms of the reliability of these signals. We find that higher transparency always raises expected bank profits, but may lead to a higher or lower expected loan volume. Moreover, higher transparency may reduce economic welfare.     

Country and industry factors in tests of Capital Asset Pricing Models for partially integrated emerging markets

Existing literature has produced broadly inconclusive evidence about the asset pricing model which best fits partially integrated markets. This paper examines whether industry and country factors are independent factors helping to determine returns in emerging stock markets, or are derived from the stocks’ risk-return characteristics. We link the country-industry decomposition framework to the local and the Global CAPM in a new and more direct way. The results show that country factors are additional independent sources of cross-sectional variation in stock returns before 1996 particularly under the Global CAPM. After 1996, the results suggest partial integration: industry and country factors are both additional independent determinants of cross-sectional variations in stock returns. .     

Taylor principle and inflation stability in emerging market countries

The goal of this paper is to evaluate the validity of the Taylor principle for inflation control in 12 developing countries that use inflation targeting regimes: Brazil, Chile, Colombia, Hungary, Israel, Mexico, Peru, Philippines, Poland, South Africa, Thailand and Turkey. The test is based on a state-space model to determine when each country has followed the principle; then a threshold unit root test is used to verify if the stationarity of the deviation of the expected inflation from its target depends on compliance with the Taylor principle. The results show that such compliance leads to the stationarity of the deviation of the expected inflation from its target in all cases. Furthermore, in most cases, non-compliance with the Taylor principle leads to nonstationary deviation of the expected inflation.     

金融自由化、非对称调整与新兴市场的金融危机

二战后,新兴市场经济(EMS)也存在广泛的金融抑制。抑制政策可能有短期增长效应;但本文理论模型显示,长期内,竞争机制会耗散金融租金,EMS实际增长率低于有保障和自然的增长率。70年代末期以来,EMS放松了金融规制。因价格调整快于数量调整、金融市场调整快于产品和劳动力市场,金融自由化产生负产出效应。负产出是基本的风险源。来自于金融、实际部门的任何冲击以及制度与政策失灵,都可能引发金融危机。抑制程度越深,负产出效应越大,人均产出越低,自由化过程中发生金融危机的概率也越大。本文使用25个国家1980～2001年的数据,以二元选择模型对上述假说进行实证检验。     

Oil shocks,US economic uncertainty,and emerging stock markets

This paper investigates the impacts of oil price shocks and US economic uncertainty on emerging equity markets within a structural VAR model. I find that both precautionary oil demand and US economic uncertainty shocks have significant negative effects on emerging stock returns, whereas aggregate demand shocks cause a sustained rise of the returns. In particular, the direct effects of oil shocks on emerging stock returns are amplified by the endogenous response of US economic uncertainty. Variance decomposition analysis shows that oil market fundamentals and US economic uncertainty are an important determinant of emerging equity returns, accounting for 35% and 24% of their long-term variations, respectively. The heterogeneous impacts of structural shocks on individual emerging markets, however, suggest that a well-diversified portfolio can be obtainable.     

Domestic financial market frictions,unrestricted international capital flows,and crises in small open economies

Summary. We present an example of a small open economy where small increases in the world interest rate may induce a sharp decline in output and a precipitous depreciation of the exchange rate. Due to a costly state verification problem in domestic credit markets, combined with unrestricted international capital flows, our economy generates two long-run equilibria, one with low GDP and a relatively depreciated real exchange rate (RER), and one with high GDP and a relatively appreciated RER. The first is always a saddle, while the second may be a sink or a source, depending on the level of the world interest rate. A crisis is identified with the economy switching from an equilibrium path approaching the high-output steady state to the saddlepath approaching the low-output steady state. In Mexicos recent history, periods of growth associated with appreciation of the RER have alternated with periods of sharp contraction and depreciation of the RER. Our economy displays such behavior in response to changes in the world interest rate.Received: 9 April 2002, Revised: 20 March 2003JEL Classification Numbers: E5, F4.G. Antinolfi, E. Huybens: We thank Steve Fazzari, Tim Kehoe, Todd Keister, Manuel Santos, Karl Shell and especially Bruce Smith for very helpful discussions. Jaime Calleja Alderete, Eduardo Camero Godínez, and Juan Vargas Hernández provided excellent research assistance. All remaining errors are ours. Huybens was an assistant professor in the Centro de Investigación Económica, ITAM, at the time this article was written, and part of this work was completed while Antinolfi was a visiting scholar at the Federal Reserve Bank of St. Louis. The views expressed herein are those of the authors, and do not reflect those of the World Bank or the Federal Reserve Bank of St. Louis. Correspondence to: G. Antinolfi     

Inflation targeting and financial stability in emerging markets

This paper aims at investigating whether emerging market inflation targeters are more financially vulnerable than their non-targeting counterparts. It further assesses the extent to which targeting central banks are less responsive to financial imbalances, compared to those implementing alternative policy strategies. Based on a sample of 26 emerging countries, including 13 targeters, the analysis suggests that monetary policy in targeting countries is relatively more sensitive to financial risks. However, despite stronger central banks’ responses to financial imbalances, the financial sector appears to be more fragile for targeters. Our conclusion therefore challenges the view that central banks, through their policy interest rates, can guarantee the stability of the financial system. It rather suggests that the control of inflation should remain the primary monetary policy objective, while a (macro)prudential authority would be in charge of the financial stability objective.     

Tipping the (Im)balance: Capital inflows,financial market structure,and banking crises

An emerging consensus among scholars and policy‐makers identifies foreign capital inflows as one of the primary determinants of banking crises in developed countries. We challenge this view by arguing that external imbalances are destabilizing only when banks face substantial competition from securities markets in the process of financial intermediation. We assemble a dataset of banking crises covering the advanced industrialized countries from 1976 to 2011 and find evidence of a conditional relationship between capital inflows, a well‐developed securities market, and the incidence of banking crises. We further explore the impact of capital inflows on banks’ actual risk taking as indicated by their capital adequacy levels and measures of insolvency risk. Our results demonstrate that prudential capital cushions tend to decline with the combination of capital inflows and prominent securities markets. We highlight the political decisions—often made during the early days of a country's financial development—that determine the relative prominence of banks vs. non‐bank financial institutions and conclude with policy recommendations.