Capital flows,current account deficits,and financial crises in emerging market economies

Some emerging market economies are said to face today conditions similar to those faced by Mexico in 1994 at the time of its serious financial crisis. This paper identifies a number of macroeconomic and financial indicators, constructs a profile of the Mexican economy at the time of the crisis, and then compares these with the conditions in other major emerging market economies in Latin America and Asia today in order to determine the extent to which they resemble those of Mexico at the time of the 1994 crisis. The conclusion is reached that macroeconomic and financial indicators cannot by themselves predict Mexican-style financial crises. In today's world of highly integrated capital markets, any anticipation of financial unsustainability can lead to a massive capital outflow from the nation and trigger a crisis, with the catalyst usually being a worsening political problem. The usefulness of the indicators discussed is in providing a profile of the financial condition of the nation, evaluating the potential danger of a financial crisis, anticipating the depth of the crisis if one arises, and pointing to the precautions that a nation can take in trying to avoid a crisis or reduce its severity if one does occur.     

Industry and country factors in emerging market returns: Did the Asian crisis make a difference?

Should investors diversify across emerging stock markets or across industries to achieve improvements in their risk–return tradeoffs especially during financial crisis periods? We examine the issue using individual firm data from a selection of emerging markets and including the period of the 1997 Asian financial crisis. We find that country effects were the dominant force behind the low co-movements among emerging stock market returns. There is evidence of increased industry effects beginning at the time of the Asian financial crisis, but this may have been a temporary phenomenon associated with contagion effects during the crisis.     

Impact of the Financial Crisis on Cross‐Border Mergers and Acquisitions and Concentration in the Global Banking Industry

The global banking industry has seen dramatic changes in the past 40 years. Most recently, the financial liberalization of emerging markets and the global financial crisis have significantly impacted the market share of banks worldwide. This article investigates the impact of the 2007–2008 financial crisis on cross‐border mergers and acquisitions (M&As) in the banking sector and emphasizes the role of emerging‐market banks in the postcrisis consolidation trend. Using M&A data and concentration data over the period 2000–2013, our analysis indicates that the financial crisis had a significant impact on worldwide M&As, especially on the direction of the transactions. Emerging‐market banks appear to be major acquirers in the postcrisis period, targeting both neighboring countries and developed economies in Europe. We also observe an increase in bank concentration in developed markets most hit by the financial crisis, especially in the United States and the United Kingdom, whereas bank concentration decreased in emerging markets. © 2015 Wiley Periodicals, Inc.     

Diversification potential of Asian frontier,BRIC emerging and major developed stock markets: A wavelet-based value at risk approach

This study examines the portfolio risk and the co-movements between each of the BRIC emerging and South Asian frontier stock markets and each of the major developed stock markets (U.S., UK and Japan), using the wavelet squared coherence approach as well as the wavelet-based Value at Risk (VaR) method. The results show that the co-movements and diversification benefits between these markets vary over time and across frequencies. Additionally, the co-movements are intensified in the wake of the recent global financial crisis (GFC) and the Eurozone sovereign debt crisis (ESDC). More precisely, the wavelet-based VaR ratio indicates that including a BRIC or a South Asian (particularly Pakistan and Sri Lanka at both the short- and long-term) stock market in a portfolio of the developed stock markets reduces the resulting portfolio's VaR. Specifically, adding China in the medium term to this portfolio reduces risk in the pre- and during both the GFC and ESDC periods. By assigning optimal weights to the different market assets in the portfolio formulation, the analysis thus has implications for international investors.     

The global financial crisis,financial linkages and correlations in returns and volatilities in emerging MENA stock markets

The 2007 United States financial crisis has developed into the most severe worldwide economic crisis since the 1927 Great Depression. In addition to its severe repercussion in North America and the European Union, the crisis has put pressure on emerging markets in general, and the Middle East and North Africa region in particular. For a better understanding of how the crisis affected the MENA region, we focus in this paper on the global and regional financial linkages between MENA stock markets and the more developed financial markets, and on the intra-regional financial linkages between MENA countries' financial markets.     

Sovereign bond spreads determinants in Latin American countries: Before and during the XXI financial crisis

This paper aims to identify the main determinants of sovereign bond spreads in seven Latin American countries and verify the existence of contagion effect over these markets during the last financial crisis. We apply a panel data framework and find that the inflation, terms of trade ratio and the external debt and international reserves (both as percentage of GDP) are key drivers of sovereign bond spreads. Moreover, we test the crisis impact over emerging economies. Our results show that the crisis has a statistically significant impact on the EMBIG spreads since 2008.     

Tail-event driven NETwork dependence in emerging markets

This paper employs the Tail Event NETwork (TENET) to identify financial markets with greater potential risk, and simultaneously investigate the interdependence between them. We find strong time-varying connectedness across 23 emerging markets during the main crisis episodes, including the most recent COVID-19 pandemic, using data from January 1995 to May 2021. The network analysis revealed that emerging European markets are top risk transmitters, whereas emerging Asian markets are top risk receivers. China showed disconnection from the network, reflecting its diversification potential for investors. Our findings offer several policy and regulatory implications.     

An empirical analysis and extension of internalization theory in emerging markets: The role of firm-specific assets and asset dispersion in the multinationality-performance relationship

This study examines the relationship between firm multinationality and financial performance with a focus on firm-specific assets and dispersion of these assets for MNCs from emerging markets. Drawing upon internalization theory, the authors reveal that while the financial performance of manufacturing MNCs depends on technological assets, service MNCs are more dependent on marketing assets to succeed in international markets. Study findings further emphasize the critical role of the industry context in emerging markets as the authors demonstrate that international asset dispersion weakens the effects of internationalization on financial performance more for MNCs in manufacturing industries than for MNCs in services.     

Cross-border banking,credit access,and the financial crisis

We study the sensitivity of credit supply to bank financial conditions in 16 emerging European countries before and during the financial crisis. We use survey data on 10,701 applicant and non-applicant firms that enable us to disentangle effects driven by positive and negative shocks to the banking system from demand shocks that may vary across lenders. We find strong evidence that firms' access to credit was affected by changes in the financial conditions of their banks. During the crisis firms were more credit constrained if they were dealing with banks that experienced a decline in equity and Tier 1 capital, as well as losses on financial assets. We also find that access to credit reflects the balance sheet conditions of foreign parent banks. The effect of positive and negative shocks to a bank is greater for riskier firms and firms with fewer tangible assets.     

Off the cliff and back? Credit conditions and international trade during the global financial crisis

We study the collapse of international trade flows during the global financial crisis using detailed data on monthly US imports. We show that credit conditions were an important channel through which the crisis affected trade volumes, by exploiting the variation in the cost of capital across countries and over time, as well as the variation in financial vulnerability across sectors. Countries with higher interbank rates and thus tighter credit markets exported less to the US during the peak of the crisis. This effect was especially pronounced in sectors that require extensive external financing, have limited access to trade credit, or have few collateralizable assets. Exports of financially vulnerable industries were thus more sensitive to the cost of external capital than exports of less vulnerable industries, and this sensitivity rose during the financial crisis. The quantitative implications of our estimates for trade volumes highlight the large real effects of financial crises and the potential gains from policy intervention.     

Decomposing the Income Insurance Channel across OECD and Emerging Markets

This paper investigates the underlying forces driving income insurance channels for the Organisation for Economic Co‐operation and Development (OECD) and emerging markets. We find income insurance channels across countries to be driven by different subchannels. For the OECD, income insurance is mostly governed by payments for financial liabilities; for the emerging markets, income flows from nationals working abroad constitute the main income smoother. Despite the growth in cross‐border financial asset trading over the years, we could not find evidence of income smoothing via foreign assets receipts for the OECD. For the majority of emerging markets, neither receipts of foreign assets nor foreign liability payments are strong enough to insure income as well.     

Does socially responsible investment equity indexes in emerging markets pay off? Evidence from Brazil

This paper explores the financial performance of a mainstream socially responsible investment equity index in emerging markets: the Brazilian Corporate Sustainability Index. The results indicate that investors in emerging markets could accommodate their ethical values while at the same time not scarifying their overall portfolio performance in bullish market periods. However, the financial crisis led ethical investors to take a riskier and less profitable portfolio. These results seem to be due to socially responsible investment in Brazil that, as with other emerging markets, is highly influenced by social and institutional factors.     

Systematic Risk in Conventional and Islamic Equity Markets

We aim to compare the systematic risk in conventional and Islamic equity markets by introducing two dynamic risk measures. Accordingly, the level of the systematic risk in conventional markets is slightly higher than the risk in Islamic markets for most of the time. However, this difference is significant in less than 3% of the sample period. More importantly, there is no significant difference in the levels of systematic risk during the global financial crisis of 2008, suggesting that Islamic equities are not able to provide a lower market risk compared with their conventional counterparts in financial turbulent times.     

Spillover Effects among European,the US and Moroccan Stock Markets before and after the Global Financial Crisis

ABSTRACT

This paper assesses return and volatility spillovers among stock markets in Morocco, the US, UK, France and Germany represented respectively by MASI, S&P 500, FTSE 100, CAC 40 and DAX 30 indices, both before and after the global financial crisis (GFC) of 2008. The daily frequency data cover the period from January 2nd, 2002 to June 30th, 2016. Using the Diebold and Yilmaz approach, the results show varying financial connectedness between the Moroccan and the above mentioned developed stock markets. In fact, the significant increase of spillover index during the post-financial crisis period demonstrates that the US and European stock markets were the most affected. On the other hand, despite a relative increase of spillover effects coming from the US and German equity markets, our results show decline in the total net spillovers experienced by the Moroccan market after the recent financial crisis. These findings may provide some useful information to support decision-making and trading strategies for international investors.     

On the prediction of financial distress in emerging markets: What matters more? Empirical evidence from Arab spring countries

This study explores the main determinants of financial distress in 11 emerging countries. Using two-way cluster-robust standard errors, evidence shows that matured, profitable, liquid, small firms with high market-to-book ratio and low growth in assets are less prone to financial distress. Moreover, well-developed financial markets in countries with low levels of corruption reduce financial distress. Furthermore, it uses tests for equality between coefficients and moderates multiple regressions to capture the effect of firm life cycle on financial distress, over three Arab Spring sub-periods. The results imply adopting strategies to increase earned capital and cash holdings, avoid over-investment, and facilitate risk diversification strategies.     

新兴经济体市场需求变化态势与中国企业选择——基于东莞外向型企业拓展新兴市场的调研

国际金融危机后,新兴经济体成为世界经济复苏及其持续发展的主要动力来源。以IMF界定的26个新兴市场国家为范围,通过东莞外向型企业拓展新兴市场的情况调研,发现新兴市场需求具有进口规模不大、增速快、市场需求差异比较大等特征,对中国企业拓展新兴市场具有一定挑战。中国企业必须转变对新兴市场的观念,采取多路径进入新兴市场,并加强对新兴市场的维护。     

Fed Funds Rate Surprises and Financial Markets

This paper investigates the sensitivity of various financial markets to surprises in the federal funds rate. We employ the methodology outlined by Kuttner [2001] to reevaluate prior results and expand the analysis to include data up until the financial crisis, inclusive. Our data set includes additional events to previous studies, which led our results to differ than those earlier studies. For our sample excluding the financial crisis (1994–2007), we found that Fed funds surprises had a significant effect on the percent change in the S&P 500 index, but generally had little significant effect on Treasury yields and the trade-weighted dollar. We also studied a decomposition of the yield curve and found that the lack of significant effect on Treasury yields was a result of the offsetting effects of surprises on the term premium and risk-neutral yield. In addition, our analysis of the financial crisis revealed several shifts in the response of many asset classes, likely a result of the large signaling effects contained in monetary policy combined with the extraordinary events that were occurring.     

Failure to learn from failure: The 2008 mortgage crisis as a déjà vu of the mortgage meltdown of 1994

This article traces the developments in the market for residential mortgage-backed securities (MBS) during the period 1970–2008. Drawing on an analysis of trade publications, business press, and interviews with practitioners, it shows that an MBS market meltdown in 1994 provided clear signals of problems with MBS. The market participants did not re-evaluate their use of risk management tools or adjust security design in response to the 1994 crisis, suggesting a lack of understanding of the implications of the crisis. The 1994 meltdown showed that MBS were vulnerable to systematic risks and that these risks could precipitate an MBS market crash. Furthermore, the 1994 meltdown demonstrated that large-scale investment in MBS could affect the primary mortgage market, thereby rendering the MBS risks unpredictable. After 1994, MBS investment shifted to MBS backed by mortgages with default risk – a development that led to the crash of 2008. By drawing parallels between the 1994 and 2008 crises, this article shows how the MBS market failed to self-correct. The results suggest that financial market participants do not always incorporate relevant information in their decision-making and that market participants have difficulties in both foreseeing the effect of financial innovations on markets and interpreting these effects.     

Leveraging local knowledge or global advantage: Cross border bank mergers and acquisitions in Africa

This paper examines global financial markets perception of value creation for banks from across the world initiating or expanding their operations on the African continent through mergers and acquisitions (M&As) over the period 2000–2018. Especially before and during the financial crisis, we document a strong advantage of Pan-African Banks (PABs) over domestic and emerging market banks and a slight advantage over advanced market banks. These results are in line with the hypothesis that PABs benefitted from both a global expertise and local knowledge advantage in the market for corporate control. We also document how retrenchment of global banks during and in the aftermath of the global financial crisis have created opportunities for PABs.