The 1985 to 1994 Global Real Estate Cycle: An Overview

The globalization of financial markets is affecting real estate markets. During the period 1985 to 1994, a large number of countries experienced strong real estate booms that peaked around 1989 followed by severe asset price deflation and an output contraction that usually lasted until 1994. Global finance appears irreversible. Should we also expect the recurrence of real estate cycles of strong amplitude? Or does this first global cycle represent a one-time adjustment to global integration happening in many countries simultaneously? To facilitate further comparative analyses, this article inventories the international and domestic factors, in their macroeconomic and intrinsic real estate cycle dimensions, that contributed to this strong global cycle. This overview has three threads: What triggered this first global cycle? What has been its impact? Are there lessons for countries that are not yet fully integrated into global capital markets such as semireformed socialist economies, newly industrialized economies, and other developing countries?     

Sterilization of short-term capital inflows—through lower interest rates?

Reductions in international interest rates are a major cause of capital flows to emerging economies. Increases in domestic interest rates are a frequent policy response to the resulting price increases. This is often unsuccessful. The paper suggests a theoretical explanation based on distinctive features of emerging financial markets, including imperfect asset substitutability and imperfect capital mobility for some sectors of the economy. It concludes that the appropriate policy response to capital inflows may be lower interest rates.     

资产证券化的风险及其防范与化解

资产证券化业务是国际资本市场发展最快、最具活力的一种金融产品,它以其独特的筹资方式而具有高效的融资功能,同时也存在巨大的市场风险。随着我国资本市场的不断成熟,我国也开始试点,由于在经济环境、法律框架等方面的限制,我国实施资产证券化业务还面临许多障碍,为此我们必须加强对其风险的防范并采取有效的措施化解风险,不断完善我国资产证券化的模式和相关政策,使风险降到最小。     

The interrelatedness of global equity markets, money markets, and foreign exchange markets

This article investigates different aspects of global financial markets, specifically relationships among equity markets, money markets, and foreign exchange markets across countries. To represent the three major financial markets of the world, Japan is the proxy for Asia, Germany is the proxy for Europe, and the United States is the proxy for North America. Strong evidence exists that international money markets and international equity markets are becoming increasingly integrated over time. This article incorporates foreign exchange values as partial determinants of equity returns and money market returns and investigates the interactions among these three asset markets from a global perspective.     

Disharmony in international accounting standards setting: The Chinese approach to accounting for business combinations

The paper addresses two distinct aspects of disharmony in international accounting standards setting. The first aspect relates to the political economic context of financial accounting standards. This is illustrated by the Chinese standards setters’ decision to allow the pooling of interests method of accounting for business combinations despite the prohibition of this method by both the FASB and the IASB. This decision by the Chinese standards setters appears to have been based on political economic factors related to the need for industrial reorganization in China rather than a desire to serve the needs of global capital markets. The second aspect of disharmony relates to the role played by differential understandings of the fundamental objectives of financial reporting in an international context. The IASB's goal of producing one set of global accounting standards to serve the needs of global capital markets has led to a reduction in the number of permissible accounting methods and a move towards the fair value accounting model. In particular, the IASB concluded that the acquisition method of accounting for business combinations should be the only method allowed for business combinations. In contrast, the Chinese standards setters have recognized the existence of both mergers and acquisitions, and in response they created two different methods of accounting for business combinations. Effectively, the Chinese standards setters developed an alternative approach to accounting for business combinations which challenges the IASB's goal of achieving international accounting convergence through the fair value model.     

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。     

The Global Asset Management Industry: Competitive Structure and Performance

The asset management industry represents one of the most dynamic parts of the global financial services sector. Funds under institutional management are massive and growing rapidly, particularly as part of the resolution of pension pressures in various parts of the world. The industry is not, however, well understood from the perspective of industrial organization and international competition, which is the focus of this paper. It begins with a schematic of asset management in a national and global flow-of-funds context, identifying the types of asset‐management functions that are performed and how they are linked into the financial system. It then assesses in some detail the three principal sectors of the asset management industry—mutual funds, pension funds, and private-client assets, as well as foundations, endowments, central bank reserves and other large financial pools requiring institutional asset management services. Relevant comparisons are drawn between the United States, Europe, Japan and selected emerging-market countries. This is followed by a discussion of the competitive structure, conduct and performance of the asset management industry, and its impact on global capital markets.     

Firm‐Level Competition and Exchange Rate Exposure: Evidence from a Global Survey of Firms

We examine the effect of competition on exchange rate exposure using survey data from 55 countries. We find that exposure increases with the intensity of competition. Exposure is higher when firms face price competition in international and domestic product markets and when rivals compete using an unfair financial advantage. Furthermore, competition is a leading determinant of exposure, dominating the usual determinants. Exposure also increases with several determinants not previously empirically examined, such as firm‐level financial constraints. These results hold for small, large, foreign‐involved, and purely domestic firms. Finally, import‐only firms have higher exposure than export‐only firms. Our survey results are likely to capture exposure before firms’ hedging actions.     

Capital mobility and international sharing of cyclical risk

This paper investigates whether the international globalization of financial markets allows for significant cross-country risk-sharing at the business cycle frequency. We find that cross-country risk-sharing is still limited and this is unlikely to be the result of financial frictions that limit state-contingent contracts. Part of the limited international risk sharing could be the consequence of frictions that de-facto reduce the short-term mobility of financial capital. But even with these frictions we find significant divergence between model predictions and the data.     

全球金融周期、美国货币政策与“三元悖论”

全球金融周期存在的背景下“三元悖论”是否依然成立充满争议。本文通过构建包含银行与金融摩擦的两国DSGE模型,为考察全球金融周期的形成提供了理论依据。美国货币政策通过资本流动传导到外围国金融市场,使外围国信贷利率、银行风险承担以及杠杆率与美国银行趋同,形成全球金融周期。金融渠道的传导速度快于实体经济渠道导致外围国国内经济周期与金融周期相背离,外围国想要稳定经济就不得不与美国保持同向的政策利率变化,货币政策独立性将不再存在。随着全球经济一体化进程加速,估值效应的作用越来越明显,浮动汇率制度并不能隔离全球金融周期的影响也无法保证货币政策的独立性。在资本账户开放的情况下,外围国金融市场越不发达,受全球金融周期的影响越大,货币政策越不独立。     

Profitability of momentum strategies in international markets: The role of business cycle variables and behavioural biases

The paper investigates whether business cycle variables and behavioural biases can explain the profitability of momentum trading in three major European markets. Unlike previous studies, the paper nests both risk-based and behavioural-based variables in a two-stage model specification in an attempt to explain momentum profits. The findings show that, although momentum profitability in European markets is unexplained by conditional asset pricing models, it is attributable to asset mispricing that systematically varies with global business conditions. In addition, behavioural variables do not appear to matter much. Thus risk factors, which are undetected thus far and are largely attributable to the business cycle, could explain the momentum payoffs in European stock markets.     

Financial Regulation,Financial Globalization,and the Synchronization of Economic Activity

We analyze the impact of financial globalization on business cycle synchronization using a proprietary database on banks’ international exposure for industrialized countries during 1978 to 2006. Theory makes ambiguous predictions and identification has been elusive due to lack of bilateral time‐varying financial linkages data. In contrast to conventional wisdom and previous empirical studies, we identify a strong negative effect of banking integration on output synchronization, conditional on global shocks and country‐pair heterogeneity. Similarly, we show divergent economic activity due to higher integration using an exogenous de‐jure measure of integration based on financial regulations that harmonized EU markets.     

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.     

Stock returns and volatility following the September 11 attacks: Evidence from 53 equity markets

September 11 attacks matter, and why not? Given that globalization has integrated financial markets, the magnitudes of the effect of the September 11 attacks on global markets are expected to be pervasive. We used data from 53 equity markets to investigate the short term impact of the September 11 attacks on markets' returns and volatility. Our empirical findings indicate that the impact of the attacks resulted in significant increases in volatility across regions and over the study period. However, stock returns experienced significant negative returns in the short-run but recovered quickly afterwards. Nevertheless, we find that the impact of the attacks on financial markets varied across regions. The implication here is that the less integrated regions (e.g., Middle East and North Africa) are with the international economy, the less exposed they are to shocks.     

GOLBALIZATION, CORPORATE FINANCE, AND THE COST OF CAPITAL

International financial markets are progressively becoming one huge, integrated, global capital market—a development that is contributing to higher stock prices in developed as well as developing economies. For companies that are large and visible enough to attract global investors, having a global shareholder base means having a lower cost of capital and hence a greater equity value for two main reasons: First, because the risks of equity are shared among more investors with different portfolio exposures and hence a different “appetite” for bearing certain risks, equity market risk premiums should fall for all companies in countries with access to global markets. Although the largest reductions in cost of capital resulting from globalization will be experienced by companies in liberalizing economies that are gaining access to the global markets for the first time, risk premiums can also be expected to fall for firms in long-integrated markets as well. Second, when firms in countries with less-developed capital markets raise capital in the public markets of countries (like the U.S.) with highly developed markets, they get more than lower-cost capital; they also import at least aspects of the corporate governance systems that prevail in those markets. For companies accustomed to less-developed markets, raising capital overseas is likely to mean that more sophisticated investors, armed with more advanced technologies, will participate in monitoring their performance and management. And, in a virtuous cycle, more effective monitoring increases investor confidence in the future performance of those companies and so improves the terms on which they raise capital. Besides reducing market risk premiums and improving corporate governance, globalization also affects the systematic risk, or “beta,” of individual companies. In global markets, the beta of a firm's equity depends on how the stock contributes to the volatility not of the home market portfolio, but of the world market portfolio. For companies with access to global capital markets whose profitability is tied more closely to the local than to the global economy, use of the traditional Capital Asset Pricing Model (CAPM) will overstate the cost of capital because risks that are not diversifiable within a national economy can be diversified by holding a global portfolio. Thus, to reflect the new reality of a globally determined cost of capital, all companies with access to global markets should consider using a global CAPM that views a company as part of the global portfolio of stocks. In making this argument, the article reviews the growing body of academic studies that provide evidence of the predictive power of the global CAPM as well as the reduction in world risk premiums.     

The world price of liquidity risk

This paper empirically tests the liquidity-adjusted capital asset pricing model of Acharya and Pedersen (2005) on a global level. Consistent with the model, I find evidence that liquidity risks are priced independently of market risk in international financial markets. That is, a security’s required rate of return depends on the covariance of its own liquidity with aggregate local market liquidity, as well as the covariance of its own liquidity with local and global market returns. I also show that the US market is an important driving force of global liquidity risk. Furthermore, I find that the pricing of liquidity risk varies across countries according to geographic, economic, and political environments. The findings show that the systematic dimension of liquidity provides implications for international portfolio diversification.     

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.     

Leverage, imports, profitability, exchange rates, and capital investment: a panel data study of the textile and apparel industries 1974-1987

This paper explores the relationship between capital structure and import competition for the textile and apparel industries from 1974-1987. The level of import penetration should have an important effect on business risk and hence on financial leverage. We also examine the response of leverage to the interrelationships that may exist between import competition and three other factors: firm profitability, strength of the dollar, and investment in capital equipment.The evidence suggests that leverage for the textile firms increases with rising imports but that the effect is less marked if the imports are the result of a strengthening dollar. The textile firms also seem to have inaugurated a capital investment campaign in reaction to import competition. For apparel firms, the interrelationship between profitability and import penetration seems to have been the primary determinant of leverage.     

Agenda for a new monetary reform

The thrust of this article is that once more the time has come for a broad debate on domestic and international monetary order and on the role and the rules governing the functioning of financial markets in the modern market economy. We have to define an agenda and seek a consensus for a new monetary reform that will take into account both the positive and negative lessons learned from more than twenty years of experience with liberalization, deregulation and privatization in the financial sector, with flexible exchange rates and international monetary instability. In today's world economy there is an especially dangerous contrast between, on the one hand virtually total globalization of financial markets, and the fixation of monetary policy on narrow national objectives on the other hand. The article lists eight major items that ought to be considered in this debate: (1) the adoption of common rules necessary in a global market economy, (2) the need to return to a true international monetary order, (3) redefining and strengthening the role of central banks, (4) examining the dangers of a primarily short-term finance driven globalization, (5) extending the scope of the concept of price instability beyond the domestic price index, (6) dealing with the problem of artificial risk creation in financial markets and establish a more equitable distribution of the costs of risks, (7) reconsider the current distribution between earning on financial assets and other income and counteract the deflationary bias in the current system, (8) redefine monetary and financial order that is compatible with modern information technologies, rather than lagging behind the information revolution. The article does not offer set solutions for all these issues. Its conclusion is, however, that without such a debate and a consensus on a balanced new approach, there is a real threat of a backlash, the threat of losing the advantages of liberalization and globalization and of a return to increased monetary and economic nationalism and to excessive government intervention and control.     

GLOBALIZATION OF CAPITAL MARKETS AND THE ASIAN FINANCIAL CRISIS

This article has three basic aims: (1) to analyze the impact of the opening of their capital markets on the economies of host countries; (2) to investigate the causes of the Asian financial crisis; and (3) to evaluate the likely effects of the South Korean government's recent attempts to restructure its corporate sector. Although the recent Asian financial crisis has led some to question the merits of open capital markets and to call for regulatory restraints on capital flows across international borders, the scientific evidence suggests that the opening of stock markets to foreign investors has been largely beneficial for emerging economies. On average, stock market liberalization has been accompanied by increases in stock prices and reductions in stock return volatility, reductions in inflation, and reductions in the rate of currency depreciation. Much of the blame for the Asian currency crises is assigned to Asian policymakers' futile attempts to defy market forces by trying to maintain their currencies at artificially high levels. But a more fundamental cause of Asia's economic problems has been the widespread value destruction by Asian corporations, which has led to a lower value for the overall economy and weakened the banking sector. The government-directed banking systems and weak corporate governance structures (including managerial incentives to increase size and market share at the expense of shareholders) that characterize most Asian economies have resulted in systematic overinvestment, bloated payrolls, and sharp declines in corporate profitability. While applauding most of the Korean government's recent measures to reform the economy, the article expresses skepticism about the government-mandated restructuring of the chaebol known as the “big deal.” Rather than trying to direct the process of restructuring, Korean policymakers should limit their efforts to improving the market mechanism by increasing competition in the markets for capital, corporate control, and goods and services. The Korean market for corporate control transactions could be greatly improved by increasing the efficiency of bankruptcy proceedings and by allowing hostile takeovers by foreign as well as domestic investors. To increase the productivity of capital, Asian companies should seek to realign managerial with shareholder interests by tying compensation to measures of value creation like EVA.