stock market linkages evidence from latin america abstract this study investigates the dynamic interdependence of the major stock markets in latin america using data from 1995 to 2000 we examine the stock market indexes of argentina brazil chile colombia mexico and venezuela the index level series are non stationary and so we employ cointegration analysis and error correction vector autoregressions var techniques to model the interdependencies we find that there is one cointegrating vector which appears to explain the dependencies in prices the results are robust to sensitivity tests based on translating indexes to us dollars i e a common currency for all the markets and to partitioning the sample into periods before and after the asian and russian financial crises of 1997 and 1998 respectively our results suggest that the potential for diversifying risk by investing in different latin american markets is limited

capital controls global liquidity traps and the international policy trilemma the zero bound on interest rates introduces a new dimension to the trilemma in international policy the openness of the international financial market might render monetary policy ineffective even within a system of fully flexible exchange rates because shocks that lead to a liquidity trap in one country are propagated through financial markets to other countries however the effectiveness of monetary policy can be restored by the imposition of capital controls we derive the optimal response of monetary policy to a global liquidity trap in the presence of capital controls we show that even though capital controls might facilitate effective monetary policy capital controls are not generally desirable in terms of welfare

the rise and fall of the washington consensus as a paradigm for developing countries abstract the introduction of the washington consensus involved not simply a swing from state led to market oriented policies but also a shift in the ways in which development problems were framed and in the types of explanation through which policies were justified key changes were the partial globalization of development policy analysis and a shift from historicism to ahistorical performance assessment the main challenge to this approach is a latent southern consensus which is apparent in the convergence between east asian developmentalism and latin american neostructuralism the demise of the washington consensus is inevitable because its methodology and ideology are in contradiction

changes in the comovement of european equity markets this paper investigates the impact that the removal of exchange controls within major european economies has had on the interdependence of european equity markets for five years prior to the removal of exchange controls and five years following their removal we use impulse responses and variance decompositions from vector autoregressions to illustrate that european equity markets have become substantially more integrated after the removal of exchange controls we undertake further tests that demonstrate that even if we allow for parallel macroeconomic harmonization the removal of exchange controls has been a major cause of increased equity market integration within europe

leads lags and trading in global markets the development of capital markets around the world has given rise to growing interest in how the markets are linked this study using the dow jones company country and industry indexes found that the united states has statistically significant one day leads over markets in europe and asia that no significant leads extend beyond one day that changes in foreign exchange rates contribute to the links among markets and that the industries designated global are significantly more sensitive to leads than are local industries lead lag relationships may allow yield enhancement possibly even arbitrage through trading futures in some markets

international transmission of information evidence from the euroyen and eurodollar futures markets abstract this paper examines the information transmission between japan and the us by using the tokyo euroyen and chicago eurodollar futures these two interest rate futures markets provide a better understanding of international information transmission than stock markets which have been shown to exhibit nonsynchronous trading and market segmentation the results show that traders in tokyo chicago use information that is revealed overnight in chicago tokyo the bivariate egarch t model provides no evidence of volatility spillovers in either direction suggesting that the opening price rapidly reflects foreign information the overall results support the hypothesis that the domestic market efficiently adjusts to foreign news the results are also broadly consistent with the covered interest arbitrage effects

the case for open market purchases in a liquidity trap prevalent thinking about liquidity traps suggests that the perfect substitutability of money and bonds at a zero short term nominal interest rate renders open market operations ineffective for achieving macroeconomic stabilization goals we show that even were this the case there remains a powerful argument for large scale open market operations as a fiscal policy tool as we also demonstrate however this same reasoning implies that open market operations will be beneficial for stabilization as well even when the economy is expected to remain mired in a liquidity trap for some time thus the microeconomic fiscal benefits of open market operations in a liquidity trap go hand in hand with standard macroeconomic objectives motivated by japan s recent economic experience we use a dynamic general equilibrium model to assess the welfare impact of open market operations for an economy in japan s predicament we argue japan can achieve a substantial welfare improvement through large open market purchases of domestic government debt

estimating the correlation structure of international share prices recently the case for international portfolio diversification has been convincingly argued in the framework of mean variance portfolio analysis by a number of researchers however virtually no empirical documentation exists concerning the best method for estimating the correlation structure of international share prices in this paper 12 models for estimating the international correlation matrix are presented and empirically tested relative to full historical extrapolation the major evaluation criteria are the mean squared error and stochastic dominance based on the frequency distribution of the squared forecast errors the results indicate that the national mean model strictly dominates all the others in terms of forecasting accuracy in the last fifteen years or so a number of researchers have convincingly argued the case for international portfolio diversification as opposed to purely domestic diversification in the framework of mean variance portfolio analysis see e g grubel 4 levy and sarnat 8 solnik 12 mcdonald 10 lessard 6 and subrahmanyam 15 1 in spite of the emerging consensus in the academic and investment communities that investors can benefit from international diversification in terms of a more efficient risk return tradeoff virtually no empirical documentation exists concerning the best method for estimating the correlation structure of international share prices since estimating this correlation structure is a necessary precondition for being able to apply modern portfolio theory to international investments empirical examination is of major importance moreover only through empirical examination of the correlation structure will the effort to devise a simple algorithm that can be used to solve for the optimal international portfolio be facilitated in order to trace out the set of ex ante efficient international porffolios using the tenets of modern portfolio theory the investor must obtain accurate estimates of the expected return and the variance of return for each domestic and foreign security and he must also obtain accurate estimates of the correlation coefficients of the returns between each pair of securities stated in terms of his numeraire

monetary policy when interest rates are bounded at zero this paper assesses the importance of the zero lower bound on nominal interest rates for the interest rate channel of monetary policy we simulate several interest rate setting policy rules with ei

commodity trade and international risk sharing how much do financial markets matter abstract this paper evaluates the social gains from international risk sharing in some simple general equilibrium models with output uncertainty a simulation model calibrated to selected moments of u s and japanese data estimates the incremental loss from a ban on international portfolio diversification to be on the order of 0 20 percent of output per year even the theoretical gains from asset trade may disappear under alternative sets of assumptions on preferences and technology the paper argues that the small magnitude of potential trade gains may help explain the apparently inconsistent findings of empirical studies on the degree of international capital mobility

price stability in open economies this paper studies the conditions under which price stability is the optimal policy in a two country open economy model with imperfect competition and price stickiness special conditions on the levels of country specific distortionary taxation and the intratemporal and intertemporal elasticities of substitution need to be satisfied these restrictions apply to both cooperative and non cooperative settings most importantly we show that cooperative and non cooperative solutions do not coincide despite market completeness and producer currency pricing in this framework our analysis suggests a role for international policy coordination

discretionary monetary policy and the zero lower bound on nominal interest rates abstract ignoring the existence of the zero lower bound on nominal interest rates one considerably understates the value of monetary commitment in new keynesian models a stochastic forward looking model with an occasionally binding lower bound calibrated to the u s economy suggests that low values for the natural rate of interest lead to sizeable output losses and deflation under discretionary monetary policy the fall in output and deflation are much larger than in the case with policy commitment and do not show up at all if the model abstracts from the existence of the lower bound the welfare losses of discretionary policy increase even further when inflation is partly determined by lagged inflation in the phillips curve these results emerge because private sector expectations and the discretionary policy response to these expectations reinforce each other and cause the lower bound to be reached much earlier than under commitment

civil society collaboration with business bringing empowerment back in abstract strategic partnerships between civil society organizations csos and businesses are widely promoted as important new strategies to encourage corporate citizenship in the global south this study tested these claims by examining 10 cases of collaboration between csos and businesses in brazil india and south africa findings suggest a sobering view of the benefits that civil society organizations and their constituencies can expect from collaboration development impacts may be more likely in sectors clearly linked to business interests such as education and employment generation goals of organizational capacity building are more likely to be satisfied than those of citizen empowerment csos and businesses reap mutual benefits from collaboration but csos tend to shoulder more of the costs businesses can dominate collaborative decision making with negative results for sustainability the paper offers a number of propositions to guide further research and inform collaborative practice empowered civil society collaboration with business is suggested as a more appropriate model than strategic partnership for csos pursuing sustainable development

the fiscal multiplier and spillover in a global liquidity trap we consider the fiscal multiplier and spillover in an environment in which two countries are caught simultaneously in a liquidity trap using an optimizing two country sticky price model we show that the fiscal multiplier and spillover are contrary to those predicted in textbook economics for the country with government expenditure the fiscal multiplier exceeds one the currency depreciates and the terms of trade worsen the fiscal spillover is negative if the intertemporal elasticity of substitution in consumption is less than one and positive if the parameter is greater than one incomplete stabilization of marginal costs due to the existence of the zero lower bound is a crucial factor in understanding the effects of fiscal policy in open economies

information trading volume and international stock return comovements evidence from cross listed stocks we investigate the joint dynamics of returns and trading volume of 556 foreign stocks cross listed on u s markets heterogeneous agent trading models rationalize how trading volume reflects the quality of traders information signals and how it helps to disentangle whether returns are associated with portfolio rebalancing trades or information motivated trades based on these models we hypothesize that returns in the home u s market on high volume days are more likely to continue to spill over into the u s home market for those cross listed stocks subject to the risk of greater informed trading our empirical evidence provides support for these predictions which confirms the link between information trading volume and international stock return comovements that has eluded previous empirical investigations

correlations in price changes and volatility across international stock markets the short run interdependence of prices and price volatility across three major international stock markets is studied daily opening and closing prices of major stock indexes for the tokyo london and new york stock markets are examined the analysis utilizes the autoregressive conditionally heteroskedastic arch family of statistical models to explore these pricing relationships evidence of price volatility spillovers from new york to tokyo london to tokyo and new york to london is observed but no price volatility spillover effects in other directions are found for the pre october 1987 period article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

the role of consumption substitutability in the international transmission of monetary shocks abstract this paper develops a general framework to analyze the impact of monetary shocks in an open economy focusing on the role of the degree of substitutability between goods produced in different countries we extend the contributions by obstfeld and rogoff obstfeld m rogoff k 1995 exchange rate dynamics redux journal of political economy 103 624 659 and corsetti and pesenti corsetti g pesenti p 1997 welfare and macroeconomic interdependence nber working paper 6307 to show that the welfare impact differs across countries when the degree of substitutability between goods produced in different countries is different from the degree of substitutability between goods produced in the same country a shock that would be beneficial in a closed economy can have an adverse beggar thyself effect in the country where it takes place or an adverse beggar thy neighbor effect on its neighbor

arbitrage asset pricing under exchange risk this paper extends the arbitrage pricing theory to an international setting specifying a linear factor return generating model in local currency terms the author shows that the usual risk diversification rule in the arbitrage pricing theory does not yield a riskless portfolio unless currency fluctuations obey the same factor model as asset returns the author then considers an arbitrage portfolio whose exchange risk is hedged by foreign riskless bonds under the resulting no arbitrage conditions the expected returns are not on the same hyperplane unlike the closed economy arbitrage pricing theory unless they are adjusted by the cost of exchange risk hedging copyright 1991 by american finance association

the consumption based asset pricing model a note on potential tests and applications abstract breeden s demonstration that merton s multi beta capital asset pricing model can be collapsed into a single beta model where betas are computed with respect to aggregate consumption is an important theoretical advance nonetheless breeden s model retains many of the empirical problems that beset merton s earlier version in general the consumption betas will be nonstationary so that the state variables must be observable for the model to be estimated

measurement of market integration and arbitrage we develop a measurement theory of market integration based on two notions of integrated markets first two markets cannot be perfectly integrated in any sense if one can construct two portfolios one from each market that have identical payoffs but different prices in that case the law of one price is violated across the markets second they cannot be integrated in a stronger sense if there are cross market arbitrage opportunities two measures of market integration are developed respectively reflecting these notions the smaller the measures the more closely integrated in the respective senses the markets among other things they are interpreted as measuring pricing discrepancy between markets article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

financial frictions and policy cooperation a case with monopolistic banking and staggered loan contracts abstract do financial frictions call for cross border policy cooperation this paper investigates the implications of financial frictions in the form of staggered loan contracts supplied by monopolistic banks for monetary policy using the linear quadratic lq framework we show that policy cooperation yields long run gains in addition to gains from stabilizing inefficient fluctuations over the business cycle as usually found in models with price rigidities the ramsey optimal steady states differ between cooperation and noncooperation such gains from cooperation arise irrespective of capital account liberalization

twin deficits openness and the business cycle in this paper we study the co movement of the government budget balance and the trade balance at business cycle frequencies in a sample of 10 oecd countries we find that the correlation of the two time series is negative but less so in more open economies moreover for the us the cross correlation function is s shaped we show that a standard business cycle model featuring government spending and technology shocks is able to replicate these empirical regularities the model predicts that conditional on spending shocks the correlation of the budget balance and the trade balance is close to perfect consistent with the twin deficit hypothesis despite this high correlation however the economic effect of spending shocks on the trade balance is contained if the economies are not very open to trade

on testing the arbitrage pricing theory inter battery factor analysis this paper tests the arbitrage pricing theory apt by estimating the factor loadings that are consistent between two industry groups of securities one of the pitfalls in the study by roll and ross is that the factors estimated in one group may not be the same with the factors estimated in another group this raises some concerns on the acceptability of their conclusions for our study we employ inter battery factor analysis which enables us to estimate factor loadings by constraining the factors to be the same between two different groups our results show that there seem to be five or six inter group common factors that generate daily returns for two industry groups of securities and these inter group common factors do not seem to depend on the size of groups also based on our cross sectional tests on the risk premia we conclude that the apt should not be rejected the arbitrage pricing theory apt introduced by ross 35 36 provides another model for explaining the relationship between return and risk the apt may be conceived as an alternative to the well known capital asset pricing model capm introduced by sharpe 39 lintner 27 and mossin 29 and later modified by black 1 both models assert that every asset must be compensated only according to its systematic risk one of the major differences is that in the capm the systematic risk of an asset is defined to be the covariability of the asset with the market portfolio whereas in the apt the systematic risks are defined to be the covariability with not only one factor but also possibly with several economic factors another difference is that the capm requires the economy to be in equilibrium whereas the apt requires only that the economy has no arbitrage opportunities note that the absence of arbitrage condition is necessary but not sufficient for the economy to be in equilibrium thus the apt is a more fundamental relationship than the capm in the sense that a rejection of the apt implies the rejection of the capm but not vice versa despite numerous attempts the capm has not been satisfactorily tested and furthermore roll s critique 32 33 casts serious doubts on the testability of the capm itself roll argues that the linear relationship between return and risk will hold for any efficient portfolio thus unless the market portfolio is observed a test of the capm using ex post data is ambiguous it results only in testing the

fiscal policy in a currency union at the zero lower bound this paper constructs a two country core periphery new keynesian model of a currency union to address the interaction between the objectives of regionally directed fiscal policy constrained by a single currency and the aggregate use of fiscal policy in face of the zero lower bound zlb on policy interest rates we identify an optimal path of aggregate and relative fiscal policy responses to a negative region specific demand shock our results show that i in a monetary union the optimal policy response to an asymmetric reduction in demand concentrated in the periphery always entails a relative shift of fiscal expenditure toward the worse affected regions ii though no aggregate fiscal response is required outside the zlb and iii optimal union wide fiscal policy is expansionary at the zlb therefore optimal policy always entails an expansion in the periphery at the zlb but the optimal fiscal response in the core regions can be either expansionary or contractionary depending on the parameters of the model however iv fiscal expansion in the core is warranted if the periphery cannot implement an expansion due to constraints on public spending

a multivariate garch model of international transmissions of stock returns and volatility the case of the united states and canada this study examines the short run dynamics of returns and volatility for stocks traded on the new york and toronto stock exchanges the main finding is that inferences about the magnitude and persistence of return innovations that originate in either market and that transmit to the other market depend importantly on how the cross market dynamics in volatility are modeled moreover much weaker cross market dynamics in returns and volatility prevail during later subperiods and especially for canadian stocks with shares dually listed in new york implications for international asset pricing hedging strategies and regulatory policy are discussed

the zero interest rate bound and the role of the exchange rate for monetary policy in japan in this paper we study the role of the exchange rate in conducting monetary policy in an economy with near zero nominal interest rates as experienced in japan since the mid 1990s our analysis is based on an estimated model of japan the united states and the euro area with rational expectations and nominal rigidities first we provide a quantitative analysis of the impact of the zero bound on the effectiveness of interest rate policy in japan in terms of stabilizing output and inflation then we evaluate three concrete proposals that focus on depreciation of the currency as a way to ameliorate the effect of the zero bound and evade a potential liquidity trap finally we investigate the international consequences of these proposals

a new approach to testing asset pricing models the bilinear paradigm we propose a new approach to estimating and testing asset pricing models in the context of a bilinear paradigm introduced by kruskal 18 this approach is both simple and at the same time quite general as an illustration we apply it to the special case of the arbitrage pricing model where the number of factors is pre specified the data appear to be generally in conflict with a five or seven factor representation of the model used by roll and ross 30 when we consider the number of replications of our test and the large number of observations on which it is performed the frequency with which we reject the three factor apm does not lead us to conclude that this model is unrepresentative of security returns further the rejection of the five and seven factor versions is to be expected if the three factor version is correct the paradigm gives insight into the appropriate specification of the model and suggests that there may be a small number of economy wide factors that affect security returns tests of asset pricing models on the basis of observed stock market data have represented a staple of the financial economics literature of the past twenty years the early work is reviewed in the famous paper by jensen 12 and papers by fama and macbeth 6 rosenberg and marathe 31 and roll and ross 30 there has been a great deal of confusion regarding what testable propositions are implied by these models see discussion in roll 29 in this paper we show that at a minimum all asset pricing models yet proposed imply a simple easily testable hypothesis which we refer to as the bilinear hypothesis while specific models may imply further testable propositions if the bilinear hypothesis is rejected the model is inconsistent with the data and should be rejected our test exploits the fact that the economic content of any equilibrium asset pricing model can be expressed in the form of a potentially refutable constraint on the set of parameters of the process generating security returns this constraint specifies that given a set of security specific characteristics there exists a linear relationship common across securities relating expected returns to these

optimal monetary policy under commitment with a zero bound on nominal interest rates we determine optimal monetary policy under commitment in a forwardlooking new keynesian model when nominal interest rates are bounded below by zero the lower bound represents an occasionally binding constraint that causes the model and optimal policy to be nonlinear a calibration to the u s economy suggests that policy should reduce nominal interest rates more aggressively than suggested by a model without lower bound rational agents anticipate the possibility of reaching the lower bound in the future and this amplifies the effects of adverse shocks well before the bound is reached while the empirical magnitude of u s mark up shocks seems too small to entail zero nominal interest rates shocks affecting the natural real interest rate plausibly lead to a binding lower bound under optimal policy however this occurs quite infrequently and does not imply positive average inflation rates in equilibrium interestingly the presence of binding real rate shocks alters the policy response to non binding markup shocks

a critical reexamination of the empirical evidence on the arbitrage pricing theory this paper demonstrates that the roll and ross rr and other previously published tests of the apt are subject to several basic limitations there is a general nonequivalence of factor analyzing small groups of securities and factor analyzing a group of securities sufficiently large for the apt model to hold it is found that as one increases the number of securities the number of factors determined increases this increase in the number of factors with larger groups of securities cannot readily be explained by a distinction between priced and nonpriced risk factors as it is impermissible to carry out tests on whether a given risk factor is priced using factor analytic procedures the apt model as exposited by ross 17 18 and extended by huberman 9 has provided the basis of an extensive literature as for example brown and weinstein 1 chen 3 hughes 10 ingersoll 11 jobson 12 reinganum 15 roll and ross rr 16 and shanken 17 to mention but a few it has also been treated in a more general context by chamberlain and rothschild 2 our purpose here is not to comment on this collection of papers many of which are unpublished but to reexamine the evidence presented by rr and point out major pitfalls involved in the empirical methodology employed by them and others who have followed their lead rr claim that on theoretical and more importantly on empirical grounds arbitrage pricing theory apt is an attractive alternative to the capital asset pricing model capm the apt it is argued requires less stringent and presumably more plausible assumptions is more readily testable since it does not require the measurement of the market portfolio and may be better able to explain the anomalies found in the application of the capm to asset returns the acceptability of the apt like that of the capm or any other theory ultimately depends on its ability to explain the relevant empirical evidence our subsequent discussion will show that many of the prqblems associated with the capm are also present in the apt context and that its ability to explain the relevant empirical evidence is not markedly superior moreover it raises questions not only about the rr and related empirical investigations of the apt but also about the testability of that theory in the present state of the art a major part of the problem results from the necessity to break down the universe being analyzed through the apt model this is forced upon the investigator by the fact

the nobel memorial prize for robert f engle work is a fine example of best practice applied time series econometrics he identifies important dynamic economic phenomena formulates precise and interesting questions about those phenomena constructs sophisticated yet simple econometric models for measurement and testing and consistently obtains results of widespread substantive interest in the scientific policy and financial communities although many of engle s contributions are fundamental i will focus largely on the two most important the theory and application of cointegration and the theory and application of dynamic volatility models moreover i will discuss much more extensively engle s volatility models and their role in financial econometrics for several reasons first engle s nobel citation was explicitly for methods of analyzing economic time series with time varying volatility arch whereas granger s was for for methods of analyzing economic time series with common trends cointegration second the credit for

implications of keeping up with the joneses behavior for the equilibrium cross section of stock returns international evidence this paper tests the cross sectional implications of keeping up with the joneses kuj preferences in an international setting when agents have kuj preferences in the presence of undiversifiable nonfinancial wealth both world and domestic risk the idiosyncratic component of domestic wealth are priced and the equilibrium price of risk of the domestic factor is negative we use labor income as a proxy for domestic wealth and find empirical support for these predictions in terms of explaining the cross section of stock returns and the size of the pricing errors the model performs better than alternative international asset pricing models

designing targeting rules for international monetary policy cooperation this study analyzes a two country dynamic general equilibrium model with nominal rigidities monopolistic competition and producer currency pricing a quadratic approximation to the utility of the consumers is derived and assumed as the policy objective function of the policymakers it is shown that only under special conditions there are no gains from cooperation and moreover that the paths of the exchange rate and prices in the constrained efficient solution depend on the kind of disturbance that affects the economy it might be the case either for fixed or floating exchange rates despite this result simple targeting rules that involve only targets for the growth of output and for both domestic gdp and cpi inflation rates can replicate the cooperative allocation

international corporate diversification market valuation and size adjusted evidence errunza and senbet es 7 analyze the effects of international operations on the market value of the firm both at theoretical and empirical levels the theoretical model which is largely heuristic exploits the costly supply adjustment of multinational firms mncs in providing international portfolio diversification services to investors who face differential cost barriers to direct holdings of assets across national boundaries mncs compete as financial intermediaries to undo the barriers so that in equilibrium profits are driven out mncs and pure domestic firms sell at an equivalent risk adjusted return however costly financial intermediation and the associated relative efficiency leads to a positive valuation effect for mncs relative to purely domestic firms further the equilibrium analysis implies that demand side investor barriers to international capital flows alone are inconsequential to the valuation of mncs in their pure financial role but that the interaction with the supply side costs are necessary to produce a valuation effect at the corporate level es subject the theory to an empirical analysis in a value based approach by employing a variant of tobin s 17 qratio the analysis controlling for industrial market power suggests that the relationship between the excess valuation and the degree of international involvement doi has magnified over periods characterized by severe u s government controls vis a vis the more recent periods in this paper we formalize the theoretical argument by viewing indirect portfolio diversification by mncs as a means of completing the international capital market we employ a paradigm in the unanimity literature and formally characterize the equilibrium in which there is a rationale for mnc financial intermediation we then perform an expanded empirical study by employing generalized least squares and maximum likelihood procedures since the positive relationship between excess valuation and doi as suggested in es 7 might be attributed to the so called small firm or size and the p e effects the test methodology controls for such effects also the traditional literature has relied upon foreign sales percentage as a proxy for doi in view of the well recognized limitations of this proxy we employ four different measures of international

ngo performance what breeds success new evidence from south asia abstract what is the best way for nongovernment organisations ngos to make a lasting impact on poverty this paper summarizes the findings of recent research into the impact sustainability and cost effectiveness of two ngos in india and two projects implemented by save the children fund uk in bangladesh the factors determining performance are explored through the interaction of organizational decisions with the external context although these interactions are complex and dynamic some clear conclusions emerge making a difference to livelihoods and capacities among poor people depends on ngo successes in fostering autonomous grassroots institutions and linking them with markets and political structures at higher levels these conclusions question the current predilection among donor agencies to fund large scale ngo service delivery

the effects of international operations on the market value of the firm theory and evidence this paper investigates the existence of monopoly rents associated with international operations in a market value theoretic framework the benefits of international operations evolve from such factors as 1 imperfections in the product and factor markets 2 differential international taxation and 3 imperfections in the financial markets in this paper these factors are subject to an equilibrium analysis in the context of recent advances in financial theory in particular imperfections in the financial sector arising from corporate international diversification are examined in a framework which allows a supply adjustments by multinational firms and b the interaction of barriers to international capital flows faced by both firms and investors taking the u s capital market and investors as a base we then specify the conditions under which the foregoing imperfections get priced out in an equilibrium these pricing effects cannot be detected empirically through the methodologies employed by the existing studies which examine the effects of corporate international diversification indeed it was an attempt to rescue the limitations of these studies which initially motivated our paper the existing empirical inquiries into this area rely on traditional risk adjusted performance measures e g 7 or international analogs of return generating processes e g 1 8 instead at the empirical level we employ a value based method which is in the same vein of the thomadakis 17 approach developed to identify the monopoly benefits of industrial market structure we conduct the tests over subperiods characterized by differential government controls in an attempt a to separate the pure financial motives for multinationality from other motives and b to detect if the benefits of international operations carry through recent periods

student t distribution based var mgarch an application of the dcc model on international portfolio risk management significant second moment transmission effects and obvious time varying patterns of correlation coefficients among major equity and currency markets in the us japan and the uk are found to exist such observations inspire the time varying setting of dynamic conditional correlation coefficients in mgarch models on the other hand the multivariate student t distribution is suitable for analysing the visible leptokurtosis that is common in financial markets both are important for international portfolio risk management thus a comparison on the hedging efficiency of hypothetical portfolios consisting of stock and currency future positions is conducted in order to justify the multivariate student t distribution based on the dcc mgarch model

estimating time varying variances and covariances via nearest neighbour multivariate predictions applications to the nyse and the madrid stock exchange index in this article we present a technique to obtain the time varying covariance matrix for several time series for nearest neighbour predictors to illustrate the use of this technique we analyse the time varying variances and correlations between the daily returns on two equity stock market indexes the new york stock exchange and the madrid stock exchange index

common volatility in international equity markets in this article we take advantage of the time varying structure of stock returns variances to investigate whether two international stock markets share the same volatility process we use a test recently developed by engle and kozicki this test is also used to assess the validity of a one factor autoregressive conditional heteroscedasticity model we find that some international stock markets have the same time varying volatility

hourly volatility spillovers between international equity markets abstract this paper examines the timing of mean and volatility spillovers between new york and london equity markets using an arch model it is found that the evidence of volatility spillovers between these markets is minimal and have a duration which lasts only an hour or so the most significant effects surround the movement of share prices around the new york opening but these results are not strong several new arch models are estimated including an asymmetric or leverage model and a non linear model which allows big shocks to have a different impact from small shocks

participation social capital and intersectoral problem solving african and asian cases abstract cooperation in policy program implementation between state and nongovernmental actors can sometimes solve intractable development problems but such cooperation must span gaps in culture power resources and perspective this article provides a comparative analysis of 13 cases of intersectoral cooperation among public agencies nongovernmental organizations grassroots groups and international donors the analysis reveals two successful implementation patterns nongovernment organization ngo mediated cooperation and grassroots centered cooperation different forms of social capital are central to the two patterns indigenous ngos with credibility across sectors are critical to the former while grassroots organizations are vital to the latter participatory decision making and mutual influence are essential to grassroots centered cooperation but less so for ngo mediated collaboration

an empirical comparison of alternative models of capital asset pricing in germany abstract in an empirical investigation this research finds that the capm is a better explanatory model of risk return relationships in the german stock market than the ccapm

escaping from a liquidity trap and deflation the foolproof way and others existing proposals to escape from a liquidity trap and deflation including my foolproof way are discussed in the light of the optimal way to escape the optimal way involves three elements 1 an explicit central bank commitment to a higher future price level 2 a concrete action that demonstrates the central bank s commitment induces expectations of a higher future price level and jump starts the economy and 3 an exit strategy that specifies when and how to get back to normal a currency depreciation is a direct consequence of expectations of a higher future price level and hence an excellent indicator of those expectations furthermore an intentional currency depreciation and a crawling peg as in the foolproof way can implement the optimal way and in particular induce the desired expectations of a higher future price level i conclude that the foolproof way is likely to work well for japan which is in a liquidity trap now as well as for the euro area and the united states in case either would fall into a liquidity trap in the future

non linear granger causality in the currency futures returns abstract this paper examines the relationship between currency futures returns by employing a test for non linear causality the results indicate evidence of unidirectional non linear causality relationship in four cases however after filtering the returns using a garch 1 1 model we find insignificant and statistically weaker non linear causality relationships

common volatility in the industrial structure of global capital markets abstract this paper investigates the nature of the volatility process among security prices for us europe and the pacific rim capital markets using a new data set that removes the problem of disparate index composition associated with aggregate stock market index series we use the common arch feature testing methodology recently developed by engle and kozicki journal of business economics 11 pp 369 380 1993 to examine the issue of a common volatility process among asset prices of nine industry groups from three economic regions of the world economy it is found that industry return series exhibit intra industry common time varying volatility process the evidence is consistent with the view that world capital markets are related through their second moments implying that a world common time varying variance specification seems to be appropriate in modeling asset prices while our empirical evidence suggests that investors can form constant variance portfolios by investing within an industry across regions they will be better off if they invest across regions and industries rather than diversify within an industry across different geographical regions that is the industrial mix of global investment portfolios accounts for a substantial proportion of the international diversification benefits finally our results appear to be consistent with roll journal of finance 47 pp 3 41 1992 view that the industrial structure of national stock exchange indices is important for explaining cross sectional return volatility differences

optimal monetary policy at the zero interest rate bound what should a central bank do when faced with a weak aggregate demand even after reducing the short term nominal interest rate to zero to address this question we solve a central bank s intertemporal loss minimization problem in which the non negativity constraint on nominal interest rates is explicitly considered we find that the optimal path is characterized by policy inertia in the sense that a zero interest rate policy should be continued for a while even after the natural rate of interest returns to a positive level by making such a commitment the central bank is able to achieve higher expected inflation lower long term nominal interest rates and a weaker domestic currency in the adverse periods when the natural rate of interest significantly deviates from a steady state level

optimal monetary policy when interest rates are bounded at zero abstract this paper characterizes the optimal monetary policy reaction function in the presence of a zero lower bound on the nominal interest rate we analytically prove and numerically show that the function is highly non linear more expansionary and more aggressive than the taylor rule we then test its empirical validity taking the case of japan in the 1990s qualitatively we find some evidence of non linear monetary policy quantitatively we find the actual monetary policy to be too contractionary during the first half of the decade while the low interest policy during the latter half turns out to be fairly consistent with the simulated path

optimal fiscal policy in a world liquidity trap we construct a model of the international transmission of liquidity trap shocks and examine the case for international coordination of scal policy to respond to the liquidity trap integrated nancial markets tend to propagate liquidity traps in a global environment scal policy may be eective in raising gdp when the economy is stuck in a liquidity trap but it does so in a beggar thy neighbor fashion when one economy is in a liquidity trap the cross country spillover eect of scal policy is negative we examine the welfare optimizing policy response to a liquidity trap when countries coordinate on scal policy fiscal policy may be an eective tool in responding to a liquidity trap although it is never optimal to use scal expansion su ciently to fully eliminate a downturn moreover there is little case for coordinated global scal expansion for the most part the country worst hit by a liquidity trap shock should use its own policies to respond without much help from foreign policies

international arbitrage pricing theory an empirical investigation in this paper we test the arbitrage pricing theory apt in an international setting inter battery factor analysis is used to estimate the international common factors and the chow test is used in testing the validity of the apt our inter battery factor analysis results show that the number of common factors between a pair of countries ranges from one to five and our cross sectional test results lead us to reject the joint hypothesis that the international capital market is integrated and that the apt is internationally valid our results however do not rule out the possibility that the apt holds locally or regionally in segmented capital markets finally the basic results of both the inter battery factor analysis and the cross sectional tests are largely invariant to the nume raire currency chosen numerous authors notably solnik 21 grauer litzenberger and stehle 11 and stulz 24 have derived various versions of the international asset pricing model iapm under alternative views of the structure of international capital markets however only a few serious attempts have been made to test various versions of the iapm these tests are largely inconclusive see solnik 20 and stehle 23 apart from the problem stressed by roll 16 of identifying the world market portfolio previous tests of the iapms suffer from the technical problem of aggregating assets of national investors using different numeraire currencies differences in the numeraire arise from differences in consumption baskets in an environment characterized by exchange rate uncertainty in a fruitful attempt to extend the arbitrage pricing theory apt of ross 18 to an international setting solnik 22 derives an international arbitrage pricing theory which is largely devoid of the aforementioned difficulties and thus more amenable to empirical testing 1 as shown by solnik testability of the apt in an

credible commitment to optimal escape from a liquidity trap the role of the balance sheet of an independent central bank we start from two empirical facts 1 central banks target cpi inflation 2 independent central banks are concerned about their balance sheet and the level of their capital the first fact makes it difficult for a central bank to implement the optimal escape from a liquidity trap because it makes a commitment to overshoot the inflation target not credible we show that the second fact helps to solve this credibility problem the optimal policy can take the form of a currency depreciation combined with a crawling peg a policy advocated by svensson as the foolproof way to escape from a liquidity trap jel e52 f31 f41 this paper starts from two empirical facts 1 central banks target infl ation measured by the consumer price index cpi 2 independent central banks are concerned about their balance sheet and the level of their capital we provide evidence for these facts below the first fact adds to the well known credibility problem of the optimal escape from a liquidity trap the second fact provides a mechanism through which the credibility problem can be solved and the optimal escape

yes the apt is testable the arbitrage pricing theory apt has been proposed as an alternative to the meanvariance capital asset pricing model capm this paper considers the testability of the apt and points out the irrelevance for testing of the approximation error we refute shanken s objections including his assertion that roll s critique of the capm is applicable to the apt we also explain the testability of the apt on subsets and we explore the relationship between the apt and the capm the arbitrage pricing theory apt has been the subject of extensive research efforts since it was introduced by ross 36 37 the research has included theoretical papers and a growing empirical literature 2 nonetheless there seems to be some confusion in the literature about the relation between the theoretical underpinnings of the apt and its empirical tests this paper is an attempt to alleviate the confusion to illustrate the issues and to provide a focus section i of this paper is devoted to examining and refuting some points raised in shanken 40 which considers the testability of the apt the underlying premise of the apt is that asset returns ri are generated by a factor model of the form

general factor models and the structure of security returns based on markowitz s pioneering study 40 sharpe 56 and lintner 38 advanced the first positivist formulations of the capital asset pricing model capm their models were subsequently refined by mossin 45 fama 15 black 1 and others even though the capm has been studied extensively it has not been empirically validated according to roll 48 the capm cannot be tested in an unambiguous fashion because of a number of intractable measurement and computational difficulties and the joint nature of the hypotheses to be tested

twin deficit or twin divergence fiscal policy current account and real exchange rate in the u s abstract in spite of concerns about twin deficits fiscal and the current account deficits for the united states economy empirical evidence suggests that twin divergence is a more usual feature of the historical data i e when fiscal accounts worsen the current account improves and vice versa this paper empirically studies the effects of fiscal policy government budget deficit shocks on the current account and the real exchange rate during the flexible exchange rate regime period based on var vector auto regression models we identified exogenous fiscal policy shocks after controlling for business cycle effects on fiscal balances in contrast to the predictions of most theoretical models the u s results suggest that an expansionary fiscal policy shock or a government budget deficit shock improve the current account and depreciate the real exchange rate increases in private savings and declines in investment contribute to the current account improvement while a nominal exchange rate depreciation as opposed to a relative price level change is mainly responsible for the real exchange rate depreciation the twin divergence of fiscal balances and current account balances is also explained by the prevalence of output shocks i e output shocks more than fiscal shocks appear to drive the co movements of the current account and the fiscal balance

information transmission between the nasdaq and asian second board markets abstract in the 1980s and early 1990s the nasdaq s success helped to prompt singapore sesdaq japan jasdaq taiwan taisdaq and south korea kosdaq to set up or formalize their own second board markets in 1999 malaysia mesdaq and hong kong gem followed suit given the growing importance of these second board markets we examine whether there is any evidence of spillovers from nasdaq returns and volatilities to asian second board market returns and volatilities after controlling for spillovers from the nyse and whether these cross country spillovers are strong relative to domestic spillovers from the corresponding main board markets we employ egarch models dynamic causality tests and var based forecast error decompositions using daily data of a recent sample period that includes the asian financial crisis of 1997 and continues until april 20 2001 there is strong evidence of lagged returns and volatility spillovers from the nasdaq market to the asian second board markets when we exclude contemporaneous main board market returns there is also strong evidence of contemporaneous and lagged returns and volatility spillovers from the local main board markets to the corresponding second board markets however even in the presence of contemporaneous main board market returns there are substantial spillovers from the lagged nasdaq returns and volatilities to asian second board market returns and volatilities these findings are not sensitive to whether we use us dollar based data or local currency based data given the difference in the trading hours between the nasdaq and asian stock markets we use available intra day return data and canadian return data the findings seem quite robust there is substantial information spillover from the nasdaq to the asian and canadian second board markets these findings indicate the existence of a substantial cross country industry effect or meteor shower effect as well as a domestic market effect or heat wave effect and imply that both country diversification and industry diversification are important

why do markets move together an investigation of u s japan stock return comovements this article explores the fundamental factors that affect cross country stock return correlations using transactions data from 1988 to 1992 we construct overnight and intraday returns for a portfolio of japanese stocks using their nyse traded american depository receipts adrs and a matched sample portfolio of u s stocks we find that u s macroeconomic announcements shocks to the yen dollar foreign exchange rate and treasury bill returns and industry effects have no measurable influence on u s and japanese return correlations however large shocks to broadbased market indices nikkei stock average and standard and poor s 500 stock index positively impact both the magnitude and persistence of the return correlations stock return cross country covariances play a key role in international finance changes in these covariances affect the volatility of portfolios and asset prices as these covariances increase one expects that a fewer domestic risks are internationally diversifiable so portfolio volatility increases b the risk premium on the world market portfolio increases 1 c the cost of capital increases for individual firms and d the domestic version of the capm becomes increasingly inadequate 2 despite the important economic consequences of changes in cross country covariances the determinants of the levels and dynamics of these covariances have been little studied from an academic

is corporate aid targeted to poor and deserving countries a case study of nestle s aid allocation summary empirical evidence on the targeting of private aid is largely lacking even though corporate donors are an increasingly important source of aid we contribute to closing this gap by performing a case study of nestle the allocation of nestle s aid is compared to that of swiss oda and ngo aid testing for both altruistic and selfish aid motivations we conclude that nestle s aid clearly lacks focus in terms of targeting poor countries which appears to be the downside of the strong link between commercial presence and aid moreover according to our tobit estimations nestle grants more aid to recipient countries with stronger democratic but also more corrupt institutions

common volatility in major stock index futures markets abstract the main objective of this paper is to investigate whether the us uk and japanese stock index futures markets have a similar volatility process for this purpose the common feature analysis proposed by engle and susmel 1993 is applied to 1988 1991 data after first removing price innovations using vector autoregression the results suggest that the three markets have a single common factor generating volatilities among markets