a note on foreigners trading and price effects across firms abstract we study the investment behavior of foreign investors in association with an equity market liberalization and find a strong link between foreigners trading and local market returns in the period following the liberalization net purchases by foreign investors induced a permanent increase in stock prices suggesting that local firms reduced their cost of equity capital we also find a strong link between a firm s fraction of foreign ownership and the magnitude of the cost reduction foreign investors seem to prefer large and well known firms and these firms realize the largest reduction in capital cost furthermore our analysis suggests that foreigners increase their net holding in firms that have recently performed well analyzing foreigners performance we find very little evidence of informed trading suggesting that risk sharing is the most plausible explanation for the reduction of the cost of equity capital

preferential trading arrangements as strategic positioning abstract we analyze a three country model of trade negotiations in which countries can form bilateral free trade areas bilateral customs unions or a trilateral preferential trading arrangement and can continue negotiating after reaching an agreement in contrast to the literature on multilateral bargaining the set of agreements can form a nonpartitional network while in contrast to the network literature players can reach multilateral agreements patient enough countries only reach bilateral agreements if insiders gain more than outsiders which allows them to manipulate the status quo in subsequent negotiations however a hub and spoke pattern may then emerge and insiders then dissipate the advantages of strategic positioning we also use variants on the model to explain why a us commitment not to bargain bilaterally sustained progress at gatt negotiations and the rarity of open access preferential trading arrangements

trade policy of a free trade agreement in the presence of foreign lobbying abstract this paper studies the effect of foreign lobbies on trade policy of a country which is a member of a free trade agreement fta it uses a monopolistically competitive political economy model in which the government determines external tariffs endogenously the effect of foreign lobbying under the fta is examined empirically using canadian industry level trade data that allow differentiating of lobby groups by the country of origin the analysis suggests that the presence of foreign lobbying has a significant effect on the domestic trade policy the heterogeneity of foreign lobbies is also important the presence of an organized lobbying group in an fta partner country tends to raise trade barriers while an organized lobbying group of exporters from outside of the fta is associated with less protection

spillovers through banking centers a panel data analysis of bank flows abstract this paper presents evidence that spillovers through bank lending contributed to the transmission of currency crises during the recent episodes of financial instability in emerging markets the innovation of the paper is that it looks beyond aggregated measures of contagion into the structure of bank flows disaggregating by banking centers the main findings are that spillovers caused by banks exposures to a crisis country help predict flows in third countries after the mexican and asian crises but not after the russian crisis in the latter there is evidence of a generalized outflow from emerging markets the importance of spillovers through banking centers suggests that countries might reduce contagion risk by diversifying the sources of their financing and by carefully monitoring borrowing from creditors exposed to potential crisis countries

imperfect competition information heterogeneity and financial contagion this study examines how heterogeneity of private information may induce financial contagion using a model of multi asset trading in which the three main channels of contagion through financial linkages in the literature correlated information correlated liquidity and portfolio rebalancing are ruled out by construction i show that financial contagion can still be an equilibrium outcome when speculators receive heterogeneous fundamental information risk neutral speculators trade strategically across many assets to mask their information advantage about one asset asymmetric sharing of information among them prevents rational market makers from learning about their individual signals and trades with sufficient accuracy incorrect cross inference about terminal payoffs and contagion ensue when used to analyze the transmission of shocks across countries my model suggests that the process of generation and disclosure of information in emerging markets may explain their vulnerability to financial contagion jel d82 g14 g15

an experimental study of incentive contracts for short and long term employees abstract motivated by real world observations of different contract offers we conduct a lab experiment to examine a principal s contract choice and agent effort in both long and short term employment relationships implemented as one shot and repeated games we find that a piece rate contract has the strongest incentive effect on short term agents effort and is the principals dominant choice nevertheless the bonus contract works almost as well as the piece rate contract for long term relationships but not so well for short term relationships in addition the bonus contract s effect on effort is mainly driven by the bonus component suggesting that a fixed wage alone is not an effective mechanism to improve workers performance

the risk of a mortality catastrophe we develop a continuous time model for analyzing and valuing catastrophe mortality contingent claims based on stochastic modeling of the force of mortality we derive parameter estimates from a 105 year time series of u s population mortality data using a simulated maximum likelihood approach based on a particle filter relying on the resulting parameters we calculate loss profiles for a representative catastrophe mortality transaction and compare them to the official loss profiles that are provided by the issuers to investors and rating agencies we find that although the loss profiles are subject to great uncertainties the official figures fall significantly below the corresponding risk statistics based on our model in particular we find that the annualized incidence probability of a mortality catastrophe defined as a 15 increase in aggregated mortality probabilities is about 1 4 compared to about 0 1 according to the official loss profiles

international financial contagion in currency crises abstract this paper examines the role of financial linkages especially through a common creditor in the propagation of emerging market crises during the 1990s using panel probit regressions on 41 emerging market countries it finds that financial linkages played a significant role in the spread of the mexican asian and russian crises the significance of financial linkages emerges after controlling for the role of domestic and external fundamentals trade spillovers and financial weaknesses in the affected countries a strong financial linkage to the crisis country of origin not only substantially raises the probability of contagion but also helps to explain the observed regional concentration of currency crises

institutional herding in international markets abstract this paper studies herding behavior of institutional investors in international markets first we document the existence of wide spread herding in 41 countries referred to as target countries hereafter in the sample we then examine the relation between contemporaneous institutional demand and future returns and find that institutional herding stabilizes prices next we examine the relation between institutional investors herding behavior and the level of information asymmetry in the target countries we measure the degree of information asymmetry in each target country along five dimensions 1 stock market development 2 ease of access to information 3 corporate transparency 4 investor rights and 5 macroeconomic factors that relate to the information environment we find evidence that institutional investors herd more in markets characterized by low levels of information asymmetry high level of information transparency this result suggests that institutional investors herding behavior is likely driven by correlated signals from fundamental information lastly we show that price adjustment is faster in informationally transparent markets

a new approach to modeling early warning systems for currency crises can a machine learning fuzzy expert system predict the currency crises effectively abstract this paper presents a hybrid causal model for predicting the occurrence of currency crises by using the neuro fuzzy modeling approach the model integrates the learning ability of the neural network with the inference mechanism of fuzzy logic the empirical results show that the proposed neuro fuzzy model leads to a better prediction of crisis significantly the model can also construct a reliable causal relationship among the variables through the obtained knowledge base compared to neural network and the traditionally used techniques such as logit the proposed model can thus lead to a somewhat more prescriptive modeling approach based on determinate causal mechanisms towards finding ways to prevent currency crises

portfolio manager behavior and global financial crises abstract i develop a two market agent based model to study how global portfolio managers affect global financial crises and stability first i create an agent based model where fund managers make their allocation decisions between two markets and a risk free asset based on the mean variance framework simulation results reveal that global managers do not create global financial crises second i extend the base model by incorporating insights from behavioral finance where risk is instead determined by fund manager losses simulation results reveal that slight global manager losses can trigger a widening of both markets risk premium accelerating the decline in asset prices worldwide statistical analysis reveals that global managers are a stabilizing force in smaller numbers however they become destabilizing in larger numbers the ability to reduce risk by diversifying across markets results in excessive risk taking if global managers exist in larger numbers systematic over leverage may result such that a deleveraging process can lead to the spreading of financial crises

momentum investment strategies portfolio performance and herding a study of mutual fund behavior this study analyzes the extent to which mutual funds purchase stocks based on their past returns as well as their tendency to exhibit herding behavior i e buying and selling the same stocks at the same time the authors find that 77 percent of the mutual funds were momentum investors buying stocks that were past winners however most did not systematically sell past losers on average funds that invested on momentum realized significantly better performance than other funds the authors also find relatively weak evidence that funds tended to buy and sell the same stocks at the same time copyright 1995 by american economic association

bilateralism multilateralism and the quest for global free trade abstract we develop an equilibrium theory of trade agreements in which both the degree and the nature bilateral or multilateral of trade liberalization are endogenously determined to determine whether and how bilateralism matters we also analyze a scenario where countries pursue trade liberalization on only a multilateral basis we find that when countries have asymmetric endowments or when governments value producer interests more than tariff revenue and consumer surplus there exist circumstances where global free trade is a stable equilibrium only if countries are free to pursue bilateral trade agreements by contrast under symmetry both bilateralism and multilateralism yield global free trade

preferential versus multilateral trade liberalization and the role of political economy abstract in this paper we analyze the effect of the freedom to pursue preferential trade liberalization permitted by article xxiv of the gatt on country s incentives to participate in multilateral negotiations and on feasibility of global free trade we present a model in which countries choose whether to participate in preferential or multilateral trade agreements under political pressures from domestic special interest groups we show that heterogeneity in political preferences across countries plays an important role in determining the relative merits of preferential and multilateral approaches to trade liberalization on one hand the opportunity to liberalize preferentially may be necessary to induce countries with strong political motivations to participate in multilateral free trade negotiations on the other hand when countries share similar political preferences multilateral free trade that would have been politically supported otherwise becomes unattainable if countries can pursue preferential liberalization

shrewd crude or simply deluded comovement and the internet stock phenomenon we show that i return comovement among internet stocks during the late 1990s and early 2000 was not exceedingly high ii there was substantial consistency in the manner by which investors distinguished among internet stocks and iii high comovement is most common during periods of price erosion these results cast doubt on the view that the extraordinary appreciation of internet stocks was due to the crude classification of all such stocks as members of a hot category

the asian financial crisis the role of derivative securities trading and foreign investors in korea abstract this paper is part of a larger research program pertaining to the role of derivatives during financial crisis and also part of the research pertaining to the causes of the asian financial crisis the korean market is studied because of two reasons 1 it is an important example of the asian financial meltdown and 2 there is a detailed data set available of all transactions by different types of protagonists including foreign investors the results in this paper indicate that futures markets and trading by foreign investors played a key role during the korean stock market turbulence in 1997

are foreign institutional investors good for emerging markets in den 1990er jahren waren die portfolio flows institutioneller investoren die dynamischsten kapitalstrome in die emerging markets in dieser arbeit leiten wir in einem rahmen asymmetrischer information funf aussagen ab stellen diese in einen zusammenhang mit der existierenden empirischen literatur und entwickeln daraus entsprechende wirtschaftspolitische implikationen die undurchsichtige informationslage auf den emerging markets behindert vor allem auslandische marktteilnehmer daruber hinaus konnen institutionelle investoren in folge finanzwirtschaftlicher offnung die position lokaler investoren unabsichtlich durch unausgewogene diversifikation und undurchsichtige risiken verschlechtern schlieslich verstarken institutionelle investoren aus dem ausland oft investitionsbooms oder finanzielle ansteckung deshalb sollten kapitalverkehrs und finanzielle liberalisierung stets von sorgfaltiger regulierung begleitet werden

foreign portfolio investors before and during a crisis different categories of foreign portfolio investors in korea have differences as well as similarities in their trading behavior before and during the currency crisis first non resident institutional investors are always positive feedback traders whereas resident investors were negative feedback contrarian traders before the crisis but switch to be positive feedback traders during the crisis second individual investors herd significantly more than institutional investors non resident institutional as well individual investors herd significantly more than their resident counterparts third differences in the western and korean news coverage are correlated with differences in net selling by non resident investors relative to resident investors

the determinants of cross border equity flows abstract we explore a new panel data set on bilateral gross cross border equity flows between 14 countries 1989 1996 we show that a gravity model explains international transactions in financial assets at least as well as goods trade transactions gross transaction flows depend on market size in source and destination country as well as trading costs in which both information and the transaction technology play a role distance proxies some information costs and other variables explicitly represent information transmission an information asymmetry between domestic and foreign investors and the efficiency of transactions the geography of information is the main determinant of the pattern of international transactions while there is weak support in our data for the diversification motive once we control for the informational friction we broaden the scope of our results by presenting some evidence linking the results on equity transactions to equity holdings

mutual funds flows and the geography of contagion abstract this paper studies the dynamics and geography of investments made by international mutual funds located in advanced markets i identify precise global and regional dynamics in equity and bond flows very few countries receive or lose funding in isolation i also find strong evidence of global contagion when financial conditions in developed markets change emerging markets funding is heavily affected i illustrate this finding by deriving contagion maps showing where contagion spreads and with what intensity in general the results suggest that push effects from advanced market investors affect massively developing countries and expose them to sudden stops and surges

fairness incentives and contractual choices this paper examines how the presence of a non negligible fraction of reciprocally fair actors changes the provision of incentives through contracts we provide experimental evidence that principals have a strong preference for less complete contracts although the standard self interest model predicts that they should prefer the more complete contract our theoretical analysis shows that fairness concerns can explain this preference for less completeness fair principals keep their promises which provides strong pecuniary incentives through an incomplete contract selfish principals free ride and exploit the agents counter intuitively selfish agents are induced to work by an incomplete contract while fair agents shirk

predicting currency fluctuations and crises do resident firms have an informational advantage the authors investigate whether resident enterprise managers have an informational advantage about the countries in which they work they propose a method for extracting information available to resident managers but unknown to investors and forecasters they rest their hypothesis of informational advantage using a unique data set the global competitiveness survey the survey asks local managers about their outlook for the country in which they reside they find that local managers do have useful private information local managers responses improve on conventional forecasts of future volatility and changes in the exchange rate which are based on economic fundamentals or interest rate differentials they find that the local business community perceived in advance the recent crises in the republic of korea russia and thailand but not those in indonesia and malaysia markets have had limited success predicting crises and might do better by drawing on private information available to resident enterprise managers who seem to know better than markets about future movements in exchange rates

on crises contagion and confusion abstract since the tequila crisis of 1994 1995 the asian flu of 1997 and the russian virus of 1998 economists have been busy producing research on the subject of contagion yet few studies have examined empirically through which channels the disturbances are transmitted if there are indeed fundamental reasons for the spillovers we observe we attempt to fill this gap by analyzing how both trade links and the largely ignored financial sector links influence the pattern of fundamentals based contagion we examine the role of international bank lending the potential for cross market hedging and bilateral and third party trade in the propagation of crises

economic determinants of the timing of preferential trade agreement formations and enlargements preferential trade agreements ptas have proliferated over the past 60 years while a small number of recent studies have examined empirically the economic determinants of the likelihood of a pair of countries having a pta this study explains empirically the timing of all pta formations and enlargements from 1950 through 2006 using duration analysis our main and novel goal is to predict in and out of sample a substantive share of these 1 560 pta events using a parsimonious model with mainly economic variables taking selection dynamics into account our analysis reveals that we can predict correctly in sample the actual year of entry into force for 26 of the 1 560 bilateral pta formations enlargements in the period 1950 2006 among 10 518 pairings of 146 countries using only a few economic and political variables moreover we can predict correctly in sample 57 of these pta events within a 10 year window leading up to the event using this model the model also performs well out of sample for the near term 82 but not if the out of sample period is very long we conclude with an evaluation of the model s ability to predict the timing of the north american free trade agreement the european union s formation and enlargements and the model s ten most likely post 2006 pta events jel f14 f15

foreign direct investment and endogenous growth in vietnam foregin direct investment s fdi s contribution to growth has been a controversial topic in economic literature and appears to be country specific in this article we use time varying coefficients in an augmented production function and let fdi indirectly affect gross domestic product growth through labour productivity this approach creates built in heteroskedasticity so the feasible generalized least square estimation is employed the results show that fdi has significant and positive effect on labour productivity and economic growth in vietnam but the effect is not equally distributed among economic sectors

optimal filtering of jump diffusions extracting latent states from asset prices this paper provides an optimal filtering methodology in discretely observed continuoustime jump diffusion models although the filtering problem has received little attention it is useful for estimating latent states forecasting volatility and returns computing model diagnostics such as likelihood ratios and parameter estimation our approach combines time discretization schemes with monte carlo methods it is quite general applying in nonlinear and multivariate jump diffusion models and models with nonanalytic observation equations we provide a detailed analysis of the filter s performance and analyze four applications disentangling jumps from stochastic volatility forecasting volatility comparing models via likelihood ratios and filtering using option prices and returns jel c11 c13 c15 c51 c52 g11 g12 g17 this paper develops a filtering approach for learning about unobserved shocks and states from discretely observed prices generated by continuous time jumpdiffusion models the optimal filtering problem which has received little attention is the natural companion to the parameter estimation problem as filters allow researchers to analyze and use their models for practical applications 1 despite its usefulness there is currently no general method for solving the filtering problem in continuous time models

feasible multilateralism and the effects of regionalism recent research has underlined the efficiency of the gatt wto rules from the standpoint of politically motivated governments emphasizing that the current multilateral rules are capable of delivering a politically efficient equilibrium such an equilibrium is however economically inefficient global free trade in particular is generally unattainable even in a fully cooperative world provided that governments have distributive motivations in such a context we show that regional trade agreements can help move the world towards a welfare superior equilibrium the reason is that as members of regional trade agreements lower trade barriers against one another they are induced to reduce their multilateral tariff sa s well once we account for these endogenous changes and only then we find that regionalism can raise world welfare even in a fully cooperative but political world we also find however that members are likely to gain too much from regional integration thereby harming outsiders

overreaction in capital flows to emerging markets booms and sudden stops this paper applies the overreaction hypothesis of de bont and thaler de bont w thaler r 1985 does stock market overreact journal of finance 40 3 793 805 developed for stock price behavior to capital flows to emerging markets we find that a surge in capital flows or what we call a capital boom can predict future sharp contractions in capital flows or sudden stops we use a large list of possible economic fundamentals as control variables and the results show that the best predictor of a sudden stop is a preceding capital boom moreover the probability of a country undergoing a sudden stop increases considerably with the length of the boom this probability more than doubles when the boom is three years old and rises by three to four times when the boom lasts for four years these results are interesting for two reasons in the first place they contradict previous studies that emphasize worsening fundamentals as the ultimate cause of a sudden stop second they are of policy interest because of the enormous negative impacts that sudden stops have on the real economy

winner loser reversals in national stock market indices can they be explained this article examines possible explanations for winner loser reversals in the national stock market indices of 16 countries there is no evidence that loser countries are riskier than winner countries either in terms of standard deviations covariance with the world market or other risk factors or performance in adverse economic states of the world while there is evidence that small markets are subject to larger reversals than large markets perhaps due to some form of market imperfection the reversals are not only a small market phenomenon the apparent anomaly of winner loser reversals in national market indices therefore remains unresolved

relative risk aversion and the transmission of financial crises we study how investor behavior affects the transmission of financial crises if investors exhibit decreasing relative risk aversion then negative wealth shocks increase the risk premium required to hold risky assets we integrate this into a second generation model of currency crises which allows for contagion through changes in fundamentals investor behavior can be a transmission channel of financial crises as changes in risk premia increase the coverage ratio and makes the defense of a peg less attractive for the policy maker the feedback effect of the risk premia on the probability of devaluation also makes multiple equilibria more likely the possible stabilization effects of capital controls and a tobin tax on the international transmission of financial crises are also studied

managers investors and crises mutual fund strategies in emerging markets the authors address the trading strategies of mutual funds in emerging markets the data set they develop permits analyses of these strategies at the level of individual portfolios a methodologically novel feature of their analysis they disentangle the behavior of fund managers from that of investors for both managers and investors they strongly reject the null hypothesis of no momentum trading funds momentum trading is positive they systematically buy winners and sell losers contemporaneous momentum trading buying current winners and selling current losers is stronger during crises and stronger for fund investors than for fund managers lagged momentum trading buying past winners and selling past losers is stronger during noncrises and stronger for fund managers investors also engage in contagion trading selling assets from one country when asset prices fall in another these findings are based on data about mutual funds that represent only 10 percent of the market capitalization in the countries considered were it a larger share of the market finding counterparties for their trades the investors who buy when they sell and sell when they buy would be difficult and the premise that funds respond to contemporaneous returns rather than causing them would become tenuous

institutional investors and long term investment evidence from chile developing countries are trying to develop long term financial markets and institutional investors are expected to play a key role this paper uses unique evidence on the universe of institutional investors from the leading case of chile to study to what extent mutual funds pension funds and insurance companies hold and bid for long term instruments and which factors affect their choices the paper uses monthly asset level portfolios to show that despite the expectations mutual and pension funds invest mostly in short term assets relative to insurance companies the significant difference across maturity structures is not driven by the supply side of debt or tactical behavior instead it seems to be explained by manager incentives related to short run monitoring and the liability structure that combined with risk factors tilt portfolios toward short term instruments even when long term investing yields higher returns thus the expansion of large institutional investors does not necessarily imply longer term markets

informational channels of financial contagion two main classes of channels are studied as informational sources of financial contagion one is a fundamental channel that is based on real and financial links between economies and the second is a social learning channel that arises when agents base their decisions on noisy observations about the actions of others in foreign markets using global games i present a two country model of financial contagion in which both channels can operate and i test its predictions experimentally the experimental results show that subjects do not extract information optimally which leads to two systematic biases that affect these channels directly base rate neglect leads subjects to underweight their prior and thus weakens the fundamental channel an overreaction bias strengthens the social learning channel since subjects rely on information about the behavior of others even when this information is irrelevant these results have significant welfare effects rooted in the specific way in which these biases alter behavior

rational contagion and the globalization of securities markets this paper argues that globalization may promote contagion by weakening incentives for gathering costly information and by strengthening incentives for imitating arbitrary market portfolios in the presence of short selling constraints the gain of gathering information at a fixed cost may diminish as markets grow moreover if a portfolio manager s marginal cost for yielding below market returns exceeds the marginal gain for above market returns there is a range of optimal portfolios in which all investors imitate arbitrary market portfolios and this range widens as the market grows numerical simulations suggest that these frictions can have significant implications for capital flows in emerging markets

do investors herd in emerging stock markets evidence from the taiwanese market abstract this paper has three main contributions to the literature on investor herds first it extends investor herding studies to an emerging yet relatively sophisticated taiwanese stock market at the sector level by using firm level data second it employs different methodologies designed to test the existence of investor herds to better understand the sources of herd behavior third it discusses the implications of different herding measures for investors exposed to systematic and unsystematic risks we find that the linear model based on the cross sectional standard deviation cssd testing methodology yields no significant evidence of herding however the non linear model proposed by chang et al 2000 and the state space based models of hwang and salmon 2004 lead to consistent results indicating strong evidence of herd formation in all sectors we also find that the herding effect is more prominent during periods of market losses our results suggest limited diversification opportunities for investors in this market especially during periods of market losses when diversification is most needed further research is necessary to see whether similar findings hold for other emerging markets

international asset allocations and capital flows the benchmark effect this paper studies channels through which well known benchmark indexes impact asset allocations and capital flows across countries the study uses unique monthly micro level data of benchmark compositions and mutual fund investments during 1996 2012 benchmarks have important effects on equity and bond mutual fund portfolios across funds with different degrees of activism benchmarks explain on average around 70 percent of country allocations and have significant impact even on active funds benchmark effects are important after controlling for industry macroeconomic and country specific time varying effects reverse causality does not drive the results exogenous pre announced changes in benchmarks result in movements in asset allocations mostly when these changes are implemented not when announced by impacting country allocations benchmarks affect capital flows across countries through direct and indirect channels including contagion they explain apparently counterintuitive movements in capital flows generating outflows from countries when upgraded and with large market capitalization and better relative performance

the unholy trinity of financial contagion over the last 20 years some financial events such as devaluations or defaults have triggered an immediate adverse chain reaction in other countries which we call fast and furious contagion yet on other occasions similar events have failed to trigger any immediate international reaction we argue that fast and furious contagion episodes are characterized by the unholy trinity i they follow a large surge in capital flows ii they come as a surprise and iii they involve a leveraged common creditor in contrast when similar events have elicited little international reaction they were widely anticipated and took place at a time when capital flows had already subsided

domestic banks as lightning rods home bias and information during the eurozone crisis european banks have been criticized for holding excessive domestic government debt during the recent eurozone crisis which may have intensified the diabolic loop between sovereign and bank credit risks by using a novel bank level data set covering the entire timeline of the eurozone crisis i first reconfirm that the crisis led to the reallocation of sovereign debt from foreign to domestic banks in contrast to the recent literature focusing only on sovereign debt i show that the banks private sector exposures were at least equally affected by the rise in home bias consistent with this pattern i propose a new debt reallocation channel based on informational frictions and show that the informationally closer foreign banks increase their relative exposures when the sovereign risk rises the effect of informational closeness is economically meaningful and robust to the use of different information measures and controls for alternative channels of sovereign debt reallocation

the gatt and gradualism abstract this paper shows how the institutional rules imposed on its signatories by the gatt created a strategic incentive for countries to liberalize gradually trade liberalization must be gradual and free trade can never be achieved if punishment for deviation from an agreement is limited to a withdrawal of equivalent concessions and if initial deviation from an agreement is also limited the paper shows how sufficiently patient countries have an incentive to deviate in a limited way when operating under gatt dispute settlement procedures

on the different geographic characteristics of free trade agreements and customs unions abstract casual observation reveals a striking phenomenon of preferential trade agreements ptas while customs unions cus are only intra regional free trade agreements ftas are inter and intra regional using a farsighted dynamic model we endogenize the equilibrium path of ptas among two close countries and one far country rising transport costs mitigate the cost of discrimination faced by the far country as a cu non member and diminish the value of preferential access as a cu member thus sufficiently large transport costs imply that an fta is the only type of pta that can induce the far country s participation in pta formation unlike cu formation fta formation can induce participation because ftas provide a flexibility benefit an fta member can form further ptas with non members but a cu member must do so jointly with all existing members hence in equilibrium cus are intra regional while ftas are intra and inter regional

does corporate governance risk at home affect investment choices abroad abstract disparity between control and ownership rights gives rise to the risk of tunneling by the controlling shareholder and is prevalent in many emerging market economies and present in some developed countries at the same time international investors come from different countries whose home markets are characterized by varying degrees of control ownership disparity this paper studies whether this difference in investors home countries affects their portfolio choice in an emerging market it combines two unique data sets on ownership and control in business groups and investor stock level foreign investment in korea a key finding is that investors from low disparity countries disfavor high disparity stocks in korea but investors from high disparity countries are indifferent moreover investors from low disparity countries became averse to disparity only after the asian financial crisis these results suggest that the nature of corporate governance in international investors home countries affects their portfolio choice abroad and therefore these investors should not be lumped together in the analyses of their portfolio choice

is the gatt wto s article xxiv bad the gatt wto article xxiv prevents a customs union cu from raising its common external tariff in this paper we compare cu formation with and without this article xxiv constraint we show in a multi country oligopoly model that for a given cu structure article xxiv improves world welfare by lowering trade barriers however we also show that article xxiv has a composition effect on cu formation it affects the endogenous choice of cus by encouraging more symmetric cus article xxiv causes more trade to be subject to trade barriers as a result article xxiv may be bad for world welfare 2012 elsevier b v

when in peril retrench testing the portfolio channel of contagion abstract the impact of past gains and losses on international investors risk aversion is an important factor in the propagation of financial shocks across countries we first present a stylized model illustrating how changes in investors risk aversion affect portfolio decisions and stock prices we then examine empirically the behavior of international mutual funds when funds returns are below average they reduce their exposure to countries in which they were overweight and vice versa an index of financial interdependence that reflects the extent to which countries share overexposed funds helps explain the pattern of stock market comovement across countries and the pattern of contagion during crises

common failings how corporate defaults are correlated we test the doubly stochastic assumption under which firms default times are correlated only as implied by the correlation of factors determining their default intensities using data on u s corporations from 1979 to 2004 this assumption is violated in the presence of contagion or frailty unobservable explanatory variables that are correlated across firms our tests do not depend on the time series properties of default intensities the data do not support the joint hypothesis of well specified default intensities and the doubly stochastic assumption we find some evidence of default clustering exceeding that implied by the doubly stochastic model with the given intensities why do corporate defaults cluster in time several explanations have been explored first firms may be exposed to common or correlated risk factors whose co movements cause correlated changes in conditional default probabilities second the event of default by one firm may be contagious in that one such event may directly induce other corporate failures as with the collapse of penn central railway in 1970 third learning from default may generate default correlation for example to the extent that the defaults of enron and worldcom revealed accounting irregularities that could be present in other firms they may have had a direct impact on the conditional default probabilities of other firms our primary objective is to examine whether cross firm default correlation that is associated with observable factors determining conditional default probabilities the first channel on its own is sufficient to account for the degree of time clustering in defaults that we find in the data

why do emerging economies borrow short term the authors argue that emerging economies borrow short term due to the high risk premium charged by international capital markets on long term debt they first present a model where the debt maturity structure is the outcome of a risk sharing problem between the government and bondholders by issuing long term debt the government lowers the probability of a liquidity crisis transferring risk to bondholders in equilibrium this risk is reflected in a higher risk premium and borrowing cost therefore the government faces a tradeoff between safer long term borrowing and cheaper short term debt second the authors construct a new database of sovereign bond prices and issuance they show that emerging economies pay a positive term premium a higher risk premium on long term bonds than on short term bonds during crises the term premium increases with issuance shifting toward shorter maturities this suggests that changes in bondholders risk aversion are important to understand emerging market crises

the dynamics of international equity market expectations this paper develops a noisy rational expectations model of the way in which international investors adjust their expectations of asset payoffs in a given country in response not only to public information signals but also to private information signals whose precision differs across investors the model predicts that the perceptions of investors in one country about the future market returns in another country are related differently to realized past returns depending on their informational disadvantage relative to other investors the greater is that informational disadvantage the greater is the change in perception associated with returns the predictions are confirmed by monthly survey data of institutional money managers investing in developed markets from 1995 to 2000

how resilient and countercyclical were emerging economies to the global financial crisis during the crises of the 1990s emerging economies usually lacked the policy tools to deal with external shocks that were available to advanced economies worldwide turbulent episodes found most emerging economies unable to perform countercyclical policies and in many cases their own vulnerabilities and poor institutional frameworks amplified negative external shocks leading to sharper recessions this paper shows that the 2008 2009 global financial crisis represents a structural break in the way emerging economies conduct their policies with more countercyclical policies pursued before and during the global crisis moreover breaking with the past emerging economies did not fall more than developed economies during the global financial crisis thus becoming more similar to developed economies the resilience of emerging economies during the 2008 2009 crisis might be partly attributed to a combination of sounder macroeconomic and financial policy frameworks with a shift towards safer domestic and international financial stances

nonlinear pricing under inequity aversion abstract we consider a monopoly which practices nonlinear pricing where buyers may have inequity averse preferences each buyer has a valuation for the good drawn from a distribution the monopoly knows the distribution but not the realizations we introduce the possibility that any buyer can be inequity averse fair types or not neutral types in addition to different demand types fair types get a disutility from inequity captured through a utility function in the spirit of the one introduced by fehr and schmidt 1999 we characterize the optimal nonlinear pricing and show that the degree of suboptimality increases and the monopoly profit decreases as the degree of the inequity aversion increases we also show that some or all of the neutral types with low demand are strictly better off when there are inequity averse types in the environment

risk analysis of collateralized debt obligations collateralized debt obligations which are securities with payoffs that are tied to the cash flows in a portfolio of defaultable assets such as corporate bonds play a significant role in the financial crisis that has spread throughout the world insufficient capital provisioning due to flawed and overly optimistic risk assessments is at the center of the problem this paper develops stochastic methods to measure the risk of positions in collateralized debt obligations and related instruments tied to an underlying portfolio of defaultable assets it proposes an adaptive point process model of portfolio default timing a maximum likelihood method for estimating point process models that is based on an acceptance rejection resampling scheme and statistical tests for model validation to illustrate these tools they are used to estimate the distribution of the profit or loss generated by positions in multiple tranches of a collateralized debt obligation that references the cdx high yield portfolio and the risk capital required to support these positions

third country effects on the formation of free trade agreements the recent proliferation of free trade agreements ftas has resulted in an increasingly complex network of preferential trading relationships the economics literature has generally examined the formation of ftas as a function of the participating countries economic characteristics alone in this paper we show both theoretically and empirically that the decision to enter into an fta is also crucially dependent on the participating countries existing fta relationships with third countries accounting for the interdependence of ftas helps to explain a significant fraction of fta formations that would not otherwise be predicted by countries economic characteristics

the allocation of catastrophe risk the potential losses from catastrophes have led financial researchers to address the following questions 1 to what extent is catastrophe risk being shared insured and is the allocation of catastrophe risk consistent with notions of optimal risk sharing 2 if not what market imperfections hinder the efficient allocation of catastrophe risk and 3 are there government policies or private market solutions that could lead to a more efficient allocation of catastrophe risk this paper summarizes the research that has been conducted on these questions 2002 elsevier science b v all rights reserved

the falsification of four popular hypotheses about the asian crisis various claims have been made about the causes of the asian crisis and its spread here we use data on the behaviour of capital flows during the crisis to test the strong forms of four such hypotheses that portfolio investors and hedge funds played a dominant role in initiating and or spreading the crisis that moral hazard kept efficient markets from predicting the crisis and finally the common lender hypothesis of kaminsky and reinhart in the process we also test implications of the calvo mendoza model of rational investor ignorance all are falsified as monocausal explanations for example portfolio investments that could not have been subject to substantial moral hazard continued to flow into asia until very shortly before the crisis likewise banks were a much larger source of capital outflows during the crisis than were portfolio investors while falsified in their strongest forms several of these hypotheses in less strong forms should play a role in a more nuanced analysis it is necessary to move past simple single factor approaches in order to produce a more complete synthetic explanation of this episode

external trade diversion exclusion incentives and the nature of preferential trade agreements in a game of endogenous trade agreements between three countries we show that while the pursuit of customs unions cus prevents global free trade from emerging as a coalition proof nash equilibrium the pursuit of free trade agreements ftas does not this result reflects the relatively flexible nature of ftas whereas each fta member can independently undertake further trade liberalization with respect to the non member cu members must do so as a group due to their common external tariff by diverting members exports away from the non member both types of trade agreements induce the non member to voluntarily lower its import tariffs

attention in games an experimental study abstract a common assumption in game theory is that players concentrate on one game at a time however in everyday life we play many games and make many decisions at the same time and have to decide how best to divide our limited attention across these settings in this paper we ask how players solve this attention allocation problem we find that players attention is attracted to particular features of the games they play and how much attention a subject gives to a given game depends on the other game that the person is simultaneously attending to

grading the performance of market indicators with utility benchmarks selected from footsie a 2000 case study the suitable choice of a benchmark portfolio is a critical problem prior to using the information ratio as the performance ranking of funds depends on this choice in this paper a method to optimize benchmark selection taking account of the investor s preferences is proposed and applied to a case study of performance for 29 market indicators on stock exchanges throughout the world the method that relies on recent results in optimization theory requires defining the opportunity set to select the benchmarks this set being footsie in the case study the computational process and numerical results are presented through tables and figures the accuracy of the method being also numerically tested