Managing risk in an unstable world

With emerging markets like China and politically unstable countries like Saudi Arabia figuring more than ever into companies' investment calculations, business leaders are turning to political risk analysis to measure the impact of politics on potential markets, minimize risks, and make the most of global opportunities. But political risk is more subjective than its economic counterpart. It is influenced by the passage of laws, the foibles of government leaders, and the rise of popular movements. So corporate leaders must grapple not just with broad, easily observable trends but also with nuances of society and even quirks of personality. And those hard-to-quantify factors must constantly be pieced together into an ongoing narrative within historical and regional contexts. As goods, services, information, ideas, and people cross borders today with unprecedented velocity, corporations debating operational or infrastructural investments abroad increasingly need objective, rigorous assessments. One tool for measuring and presenting stability data, for example, incorporates 20 composite indicators of risk in emerging markets and scores risk variables according to both their structural and their temporal components. The indicators are then organized into four equally weighted subcategories whose ratings are aggregated into a single stability score. Countries are ranked on a scale of zero (a failed state) to100 (a fully institutionalized, stable democracy). Companies can buy political risk analyses from consultants or, as some large energy and financial services organizations have done, develop them in-house. Either way, a complete and accurate picture of any country's risk requires analysts with strong reportorial skills; timely, accurate data on a variety of social and political trends; and a framework for evaluating the impact of individual risks on stability.     

Noise

The effects of noise on the world, and on our views of the world, are profound. Noise in the sense of a large number of small events is often a causal factor much more powerful than a small number of large events can be. Noise makes trading in financial markets possible, and thus allows us to observe prices for financial assets. Noise causes markets to be somewhat inefficient, but often prevents us from taking advantage of inefficiencies. Noise in the form of uncertainty about future tastes and technology by sector causes business cycles, and makes them highly resistant to improvement through government intervention. Noise in the form of expectations that need not follow rational rules causes inflation to be what it is, at least in the absence of a gold standard or fixed exchange rates. Noise in the form of uncertainty about what relative prices would be with other exchange rates makes us think incorrectly that changes in exchange rates or inflation rates cause changes in trade or investment flows or economic activity. Most generally, noise makes it very difficult to test either practical or academic theories about the way that financial or economic markets work. We are forced to act largely in the dark.     

Thriving locally in the global economy

More and more small and midsize companies are joining corporate giants in striving to exploit international growth markets. At the same time, civic leaders worry about their communities' economic future in light of the impact of global forces on the operation and survival of business. How can communities retain local vitality yet still link their business to the global economy? Harvard professor Rosabeth Moss Kanter addresses that question in this classic HBR article, orginally published in 1995. To avoid a clash between international economic interests and local political interests, globalizing business must learn how to be responsive to the communities in which they operate, Kanter says. And communities must determine how to create a civic culture that will attract and retain footloose companies. The author surveyed five U.S. regions with direct connections to the global economy--Boston, Cleveland, Miami, Seattle, and the Spartanburg-Greenville region of South Carolina--to determine their business and civic leader's strategies for improving their constituent's quality of life. She identified ways in which the global economy can work locally by capitalizing on the resources that distinguish one place from another. Kanter argues that regions can invest in capabilities that connect their local populations to the global economy in one of three ways: as thinkers, makers, or traders. She points to the Spartanburg-Greenville region as a good example of a world-class makers, with its exceptional blue-collar workforce that has attracted more than 200 companies from 18 countries. The history of the economic development of this region is a lesson for those seeking to understand how to achieve world-class status and bring local residents into the world economy.     

Serving the world's poor,profitably

By stimulating commerce and development at the bottom of the economic pyramid, multi-nationals could radically improve the lives of billions of people and help create a more stable, less dangerous world. Achieving this goal does not require MNCs to spearhead global social-development initiatives for charitable purposes. They need only act in their own self-interest. How? The authors lay out the business case for entering the world's poorest markets. Fully 65% of the world's population earns less than $2,000 per year--that's 4 billion people. But despite the vastness of this market, it remains largely untapped. The reluctance to invest is easy to understand, but it is, by and large, based on outdated assumptions of the developing world. While individual incomes may be low, the aggregate buying power of poor communities is actually quite large, representing a substantial market in many countries for what some might consider luxury goods like satellite television and phone services. Prices, and margins, are often much higher in poor neighborhoods than in their middle-class counterparts. And new technologies are already steadily reducing the effects of corruption, illiteracy, inadequate infrastructure, and other such barriers. Because these markets are in the earliest stages of economic development, revenue growth for multi-nationals entering them can be extremely rapid. MNCs can also lower costs, not only through low-cost labor but by transferring operating efficiencies and innovations developed to serve their existing operations. Certainly, succeeding in such markets requires MNCs to think creatively. The biggest change, though, has to come from executives: Unless business leaders confront their own preconceptions--particularly about the value of high-volume, low-margin businesses--companies are unlikely to master the challenges or reap the rewards of these developing markets.     

Capital markets research and real world complexity: The emerging challenge of chaos theory

The theories of chaos and complexity are presented as a wide-ranging new vision of the relationship between order and disorder, a new vision that is challenging many of the fundamental presuppositions of the older Newtonian world view of science. The implications of the new vision are explored in terms of their challenges to the methodological views widely espoused by capital market researchers in accounting, most notably with respect to the assumptions of linearity and predictability. Mandelbrot's early studies of economics and financial time series data, which provided many of the insights for his conception of fractals, are reviewed in terms of their challenges to the conceptual framework of the traditonal capital markets research paradigm and its extension to financial reporting issues. Contemporary studies which are reviving Mandelbrot's challenges are also reviewed, with the conclusion that they are weakening the intellectual hold of the tradtional capital markets paradigm and making it more susceptible to overthrow by a competing paradigm. Finally, an emerging new research program associated with the Santa Fe Institute (SFI) is reviewed. SFI researchers are studying financial markets as complex adaptive systems. Their preliminary findings are incompatible with the widely presumed theoretical linkage between financial reporting systems and economic efficiency, and they tend to undermine the traditonal rationale relating earnings to stock prices.     

Capital Market Integration in the Middle East and North Africa

This paper studies capital market integration in Middle Eastern and North African (MENA) countries and its implications for international portfolio investment allocation. Starting with four cointegration methodologies, we significantly reject the hypothesis of a stable, long-run bivariate relationship between each of these markets and the European Monetary Union (EMU), the United States, and a regional benchmark. This indicates the existence of significant diversification opportunities for three categories of investors (EMU, world, and regional investors). A recursive analysis based on Barari (2004) suggests that recently, the MENA markets have started to move toward international financial integration. Investigating the effect of selected financial, economic, and political events on such a process, we extend the methodology and find that the markets react heterogeneously to the different categories of shocks. They should therefore not be treated as a bloc for global allocation purposes. Finally, after adjusting the integration levels by relative market capitalization, Israel and Turkey are the most promising markets in the region, followed by Egypt, Jordan, and Morocco. Tunisia and Lebanon seem to be lagging behind.     

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.     

The impact of business and political news on the GCC stock markets

This paper investigates the impact of business and political news on stock market returns in the Gulf Cooperation Council (GCC) countries. For this purpose, it employs a Markov switching model including a separate index for each of the two categories of news considered. The results indicate the importance of news as drivers of GCC stock returns, with business news playing a more substantial role; further, news released in the largest financial markets in the regions are found to have significant cross-border effects.     

公司政治关联的经济后果研究与展望

企业政治关联现象在世界各国普遍存在,并对企业财务行为和业绩产生重要的影响。目前政治关联对公司业绩、财务政策以及资本市场的影响已经日益成为财务与金融领域研究的热点问题。对于我国这样典型的转型和新兴经济体国家来说,政府在资源分配中具有很大的话语权,在宏观上充当着社会资源分配者的角色,在微观上干预着企业的行为,市场机制难以充分有效地发挥作用。深刻揭示企业建立政治关联的经济后果,并通过分析现有研究的困境,发掘新的研究方向,有利于深化我国企业政治关联问题的研究。     

开办地级城市金融租赁业务的思考

租赁具有融通资金和商品交易的双重功能,具有其他金融产品部不替代的职能,在金融市场中占有重要地位,一个职能完善的金融市场不能没有金融租赁业的参与,本文从租赁业务在世界及我国的发展、地级城市开办金融租赁业务的经济基础、地级城市开办金融租赁业务的必要性、开办地级城市金融租赁的建议四个方面,对地级城市开办金融租赁业务进行了研究。     

Financial development and innovation: Cross-country evidence

We examine how financial market development affects technological innovation. Using a large data set that includes 32 developed and emerging countries and a fixed effects identification strategy, we identify economic mechanisms through which the development of equity markets and credit markets affects technological innovation. We show that industries that are more dependent on external finance and that are more high-tech intensive exhibit a disproportionally higher innovation level in countries with better developed equity markets. However, the development of credit markets appears to discourage innovation in industries with these characteristics. Our paper provides new insights into the real effects of financial market development on the economy.     

Financial markets development,business cycles,and bank risk in South America

In this paper, we examine whether banking crises or business cycles affect the influence of financial markets development on bank risk in a sample of 37 publicly listed commercial banks in seven South American countries over a 22-year period between 1991 and 2012. Banking crises in this region offer a natural setting in which the impact of financial markets development on bank risk is examined. We find that financial markets development improves banks’ capitalization ratio and reduces their exposure to non-traditional banking activities, suggesting that financial markets development on average reduces bank risk. In addition, banking crises and business cycles appear to moderate the impact of financial markets development on bank risk. In the aftermath of banking crises, banks appear to concentrate more on their core traditional banking activities.     

On the individual optimality of economic integration

Which countries find it optimal to form an economic union? We emphasize the risk-sharing benefits of economic integration. Consider an endowment world economy model, where international financial markets are incomplete and contracts not enforceable. A union solves both frictions among member countries. We uncover conditions on initial incomes and net foreign assets of potential union members such that forming a union is welfare-improving over standing alone in the world economy. Consistently with evidence on economic integration, unions in our model occur (i) relatively infrequently, and (ii) emerge more likely among homogeneous countries, and (iii) rich countries.     

Financial crisis,structure and reform

In this study, we examine the relationship between the structure of financial systems and financial crises. Using cross-country data on financial structures and crises, we find that there is a significant short-term reversal in development of the banking sector and the stock market during both bank crises and market crashes, with the corporate bond market moving in the same direction as bank credit. However, the results are significant for countries with market-based financial systems but not for countries with bank-based financial systems. Emerging markets have mainly bank-based financial systems, which may explain why these markets require more time to recover from economic downturns after a financial crisis. Therefore, we argue that governments should emphasize a balanced financial system structure as it helps countries to recover from financial crises more quickly compared with countries that lack such balanced structures.     

2012年全球经济金融形势研判及对策建议

在回顾2011年发展态势的基础上,文章对2012年全球经济金融形势进行了预测,认为2012年世界经济将延续低速增长局面,全球资本流向不确定性增强,全球主要金融市场将持续动荡,股票市场、大宗商品市场和外汇市场波动将加剧,国际银行业前景不容乐观。在此形势下。我国应灵活应对,积极防范各种风险,促进经济平稳较快增长。     

The Impact of Terrorist Attacks on International Stock Markets

We examine the effects of terrorist attacks on stock markets, using a dataset that covers all significant events and that directly relate to the major economies of the world. Our event study suggests that terrorist attacks produce mildly negative price effects. We compare these price reactions to those from an alternative type of unanticipated disaster, earthquakes, and find that price declines following terror attacks are more pronounced. However, in both cases prices rebound within the first week of the aftermath. We also compare price responses internationally and for separate industries, and find that reactions are strongest for local markets and for industries that are directly affected by the attack. Our results suggest that financial markets react strongly to terror events but then recover swiftly and soon return to business as usual. The September 11th attacks turn out to be the only event that caused long‐term effects on financial markets, especially in terms of industries' systematic risk.     

Financial Development and Intersectoral Allocation: A New Approach

This paper uses a new methodology based on industry comovement to examine the role of financial market development in intersectoral allocation. Based on the assumption that there exist common global shocks to growth opportunities, we hypothesize that country pairs should have correlated patterns of sectoral growth if they are able to respond to these shocks. Consistent with financial markets promoting responsiveness to shocks, countries have more highly correlated growth rates across sectors when both countries have well‐developed financial markets. This effect is stronger between country pairs at similar levels of economic development, which are more likely to experience similar growth shocks.     

Comovement,information production,and the business cycle

Recent theoretical research suggests that information production is a positive externality of aggregate economic activity (Veldkamp, 2005). Both the quantity and quality of information increase during periods of economic expansion and decrease during periods of contraction. Based on this insight, we hypothesize and confirm that time-varying information production drives the comovement patterns observed in stock returns. We examine stock return comovement in 36 countries from 1980 to 2007 and show that, consistent with the theory, comovement patterns are countercyclical; that is, when information production is high (low), comovement is low (high). We also find that the relation between comovement and the business cycle is stronger in countries that experience large intertemporal swings in information production. Finally, we show that the relation between business cycle and comovement is stronger in poor countries, countries with less developed financial markets, and countries with weaker accounting and transparency standards. These results suggest that financial development and transparency are conducive to a steady flow of financial information over the business cycle.     

新冠肺炎疫情、金融市场震荡与金融危机

新型冠状病毒感染肺炎疫情在全球快速蔓延后,美国等国家金融市场出现大幅度震荡,历史罕见。金融市场震荡是疫情影响投资者信心,金融市场本身的风险需要释放,以及经济基本面悲观预期等因素共同作用的结果。目前来看,疫情对实体经济造成冲击,疫情应对情况也在很大程度上决定了金融市场震荡是否演化为全球金融危机,国外金融市场震荡对国内金融市场的传导需要审慎理性处理。     

世界向多极化、多货币体系发展

世界经济金融体系正在发生深刻变革。以中国、日本、韩国、东盟十国为代表的东方经济体具有超越西方经济体经济总量的潜力。在此背景下,需要倡导更积极的国际合作,共同致力于消除贫困、保护环境、消除收入分配不平等、应对人口结构变化挑战及加强国际和平领域合作等。此外,推动世界经济的可持续发展具有重要意义,特别是在能源结构转型、粮食生态保护、教育质量、饮食健康、城市建设及数字经济等领域。未来,世界将向多极化政治经济格局、多货币体系发展,建立更为合理的世界秩序。中国的经济发展及人民币国际化进程将有利于新格局的建立。