Bond finance,bank credit,and aggregate fluctuations in an open economy

Corporate sectors in emerging markets have noticeably increased their reliance on foreign financing, presumably reflecting low global interest rates. The evidence also shows a rebalancing from bank loans towards bonds. To study these developments, we develop a dynamic open economy model where these modes of finance are determined endogenously. The model replicates the stylized facts following a drop in world interest rates; in particular, rebalancing towards bonds occurs because bank credit becomes relatively more expensive, reflecting the scarcity of bank equity. More generally, the model is suitable for studying interactions between modes of finance and the macroeconomy.     

The Variegated Financialization of Housing

There is a small but growing literature on the financialization of housing that demonstrates how housing is a central aspect of financialization. Despite the varied analyses of the financialization of housing and the importance of housing to financialization, the relations between housing and financialization remain under‐researched and under‐theorized. The financialization of housing is not really a specific form of financialization, transcending as it does a number of different forms of financialization. Housing systems, in particular, vary widely across the globe, which implies that housing financialization will be inherently variegated, path‐dependent and uneven. In this introduction to the symposium, I will discuss how the articles to follow contribute to the literature on the financialization of housing. Housing has entered a post‐Fordist, neoliberal and financialized regime. Increasingly, both mortgaged homeownership and subsidized rental housing are there to keep financial markets going, rather than being facilitated by those markets. There is little evidence that the global financial crisis has resulted in any de‐financialization of housing. There are common trajectories within uneven and variegated financialization, rather than radically different and completely unrelated forms of housing financialization.     

Stock Price Index and Exchange Rate Nexus in African Markets

This paper examines the relationship between stock price index and exchange rate in six African markets using monthly data for the period January 2007 to October 2015. A quantile regression approach is used. This methodology is shown to perform better than the ordinary least squares estimators, particularly when the conditional distribution is heterogeneous. Our empirical evidence reveals an interesting pattern in the association of these two financial markets in Africa, which shows that the negative relationship between stock and foreign exchange markets is more apparent when exchange rates are extremely low or high. The negative relationship between the two variables is in line with the portfolio balance effect.     

Stock markets’ bubbles burst and volatility spillovers in agricultural commodity markets

Our paper focuses on commodity financialization and the gradual integration between commodity and financial markets, investigating to what extent shocks in stock markets impact commodity price volatility, and the persistency of the phenomenon. To this end, we estimate Volatility Impulse Response Function from stock markets to agricultural commodity markets over a symmetric window before and after two of the most important bubble bursts since the new millennium, the 2000 dot.com bubble and the 2008 financial crises. Results highlight that volatility spillover increased significantly after the 2008 financial crises, signalling a rising interconnection between financial and agricultural commodity markets.     

Microstructures,financial reforms and informational efficiency in an emerging market

This paper investigates the effects of microstructures and financial reforms on time-varying informational efficiency in an emerging equity market setting. Our data comprises of firm level data from the Trinidad and Tobago Stock Exchange, over the period 1990–2013. Using a dynamic panel regression framework while controlling for firm size, we find that microstructures, specifically liquidity, volatility, automation and the number of shareholders have an important role in influencing the time-varying efficiency of this emerging market. The financial reforms, namely liberalisation and regulation are not found to have a notable influence. We also consider heterogeneity at the firm level, finding that the microstructures of the banking firms listed in this market have a greater impact on market efficiency, in relation to the other listed firms.     

The Relationship Between Sovereign Spreads and International Reserves: Does the Exchange Rate Regime Matter?

International reserves have been put forward as an important factor affecting sovereign spreads in the literature. This article empirically analyzes whether the relationship between international reserves and sovereign spreads depends on exchange rate policy in emerging markets. The analysis is carried out using exchange rate classifications based on both the officially declared regimes and the actual exchange rate behavior. The results show that international reserves reduce sovereign spreads for all levels of exchange rate flexibility using both classifications. Reserves have a similar effect on spreads for all exchange rate categories, except for hard pegs, under which the effect is larger.     

Nowcasting and forecasting GDP in emerging markets using global financial and macroeconomic diffusion indexes

This paper contributes to the nascent literature on nowcasting and forecasting GDP in emerging market economies using big data methods. This is done by analyzing the usefulness of various dimension-reduction, machine learning and shrinkage methods, including sparse principal component analysis (SPCA), the elastic net, the least absolute shrinkage operator, and least angle regression when constructing predictions using latent global macroeconomic and financial factors (diffusion indexes) in a dynamic factor model (DFM). We also utilize a judgmental dimension-reduction method called the Bloomberg Relevance Index (BRI), which is an index that assigns a measure of importance to each variable in a dataset depending on the variable’s usage by market participants. Our empirical analysis shows that, when specified using dimension-reduction methods (particularly BRI and SPCA), DFMs yield superior predictions relative to both benchmark linear econometric models and simple DFMs. Moreover, global financial and macroeconomic (business cycle) diffusion indexes constructed using targeted predictors are found to be important in four of the five emerging market economies that we study (Brazil, Mexico, South Africa, and Turkey). These findings point to the importance of spillover effects across emerging market economies, and underscore the significance of characterizing such linkages parsimoniously when utilizing high-dimensional global datasets.     

Political uncertainty,risk of Frexit and European sovereign spreads

Using data from a prediction market (crowd-based forecasts), we build a daily measure capturing the risk of Frexit related to the 2017 French presidential elections. We study how unexpected changes in this new measure of political uncertainty in France affect European sovereign spreads vis-à-vis Germany. We show that our uncertainty proxy drives not only the French sovereign spread but also the spreads of those EU countries deemed the most vulnerable to the risk of desegregation of the Euro Zone. These results suggest that specific political uncertainty affects short-term investor’s expectations and may outweigh other economic determinants of sovereign spreads shortly prior to high stake elections     

Volatility returns with vengeance: Financial markets vs. commodities

To assess how financial markets and commodities are inter-related, this paper introduces a ‘volatility surprise’ component into the asymmetric DCC with one exogenous variable (ADCCX) framework. We develop an econometric model in which returns and volatility allow to influence pairs of assets, and derive several case studies linking commodities to stocks, bonds and currencies from 1983 to 2013. The innovative feature of our model is that these volatility spillovers are modeled consistently within the correlation dynamics of the ADCCX. We find evidence that return and volatility spillovers do exist between commodity and financial markets and that in turn, their relative impact on each other is very substantial.