capital market segmentation and u s farm real estate pricing in this paper we present and test a segmented capital market equilibrium we extend the traditional capm by explicitly considering barriers to the flow of external equity capital into farm real estate markets the empirical results provide a plausible explanation as to why the traditional arbitrage based pricing models fail to explain equity pricing in farmland markets

capital mobility and foreign debt sustainabilty some evidence from turkey this paper address the extent of capital mobility and foreign debt sustainability in turkey over the 1962 2003 period by examining the relationship between saving and investment and imports and exports respectively the empirical investment is based on cointegration error correction models and threshold and momentum threshold autoregressive models our findings are consistent with the existence of capital mobility and the strong form of foreign debt sustainability

capital flow controls international asset pricing and investors welfare a multi country framework this paper investigates the impact of capital flow restrictions on the pricing of securities on the optimal portfolio composition for investors of different nationalities and on their welfare under capital flow controls the equilibrium price of a security is determined jointly by its international and national risk premiums and investors acquire nationality specific portfolios along with a market wide proxy for the world market portfolio removal of investment barriers generally leads to an increase in the aggregate market value of the affected securities and all investors favor a move toward market integration introduction of different types of index funds in the world market generally increases world market integration and investor welfare in recent years the international capital markets have undergone numerous important changes that have increased the international linkage of national markets these changes include the creation of national index funds e g mexico korea taiwan india france and scandinavia and selective liberalization e g brazil india korea sweden and japan despite their potential impact on the national economies and global finance it is not clear what consequences these integrating changes entail for example is welfare increased by allowing cross border investment that is restricted to purchasing the entire national portfolio of which the national index fund is a class unfortunately with the exception of subrahmanyam 1975a who studies the pricing and welfare effects of fully integrating heretofore completely segmented markets other international asset pricing models that incorporate capital flow restrictions for instance black 1974 stulz 1981b lessard et al 1983 errunza and losq 1985 cooper and kaplanis 1986 and eun and janakiramanan 1986 analyze the pricing but not the welfare effects of investment barriers to analyze systematically the welfare implications of various structural changes in the current market environment this paper follows the lead of subrahmanyam and recasts the analysis in two important respects

on universal currency hedges this paper identifies five universal currency hedge ratio uhr definitions these are hedge positions in foreign bonds stated as a fraction of national or global equity portfolios that are the same for all investors regardless of nationality the first three involve the total demand for foreign bonds and depend on equities not being held for hedging purposes the last two are associated with variance minimizing regression hedges these hold in general but are designed exclusively for hedging other traded asset positions jensen s inequality makes the choice of measurement currency irrelevant and makes the hrs universal without affecting their values

home bias and cross border taxation abstract the relationship between cross border taxation and free float home bias is examined this explicitly recognizes that insider shares are unavailable to foreigners other important explanations for home bias information asymmetry behavioural and governance issues are controlled when examining the impact of cross border tax variables in our sample of countries about sixty percent eighty percent withhold taxes on realized capital gains dividends of foreign investors and about thirty percent of the mature economies provide imputation of taxes paid on dividend income by domestic corporations dividend imputation is a statistically significant impediment to cross border equity flows a tax credit variable for foreign taxes paid on dividends is constructed and found to be statistically significant in reducing home bias a relatively high foreign tax rate that cannot be offset by tax credits is found to significantly increase home bias these results hold for float adjusted home bias and traditional international portfolio home bias

an empirical test of the effects of government deficits on money demand there is a great deal of interest in how govenment deficits affect macroeconomic variables accordingly there is a large body of theoretical and empirical work on the topic this paper examines the relationship between deficits and interest rates among the difficulties in exploring this relationship is that when conducting monetary policy the federal reserve often targets interest rates such a policy can cloud any relationship between deficits and interest rates a way to avoid this problem among others is to estimate money demand functions that contain a measure of the market value of government debt no evidence is found to support a positive relationship between government debt and money demand this finding implies budget deficits do not affect interest rates through money demand

theory based measurement of the saving investment correlation with an application to norway i introduction the findings of feldstein and horioka 19c 0 have led to numerous theoretical and empirical papers on the close correlation between domestic saving and domestic investment and its supposed implications for international capital mobility feldstein and horioka 1980 317 state that with perfect world capital mobility there should be no relation between domestic saving and domestic investment saving in each country responds to the worldwide opportunities for investment while investment in that country is financed by the worldwide pool of capital however in a cross country regression using period averaged saving and investment figures for sixteen oecd countries they obtain a significant coefficient close to unity and conclude that capital is rather immobile this result constitutes the feldstein horicka puzzle as it contradicts the widely held perception that capital is highly mobile across countries subsequent empirical work confirmed the close correlation though its implication for the degree of capital mobility is a moot point see tesar 1991 this paper contributes to the understanding of the puzzle on both theoretical and empirical counts first we present a theory based econometric specification for estimating saving investment correlations second we discuss the possible usefulness of the estimates for detecting capital mobility third we provide empirical results for the interesting case of norway we argue that feldstein and horioka s basic idea that the saving investment correlation contains information about international capital mobility is correct but that the interpretation of the estimated correlation value must be altered substantially in view of the results derived from modern macroeconomic models our research is motivated by the observation that various regression equations have been used to measure the saving investment correlation but that none of them has a firm theoretical foundation this in turn raises questions about the interpretation and comparability of the existing empirical results we propose an econometric specification that is founded in intertemporal general equilibrium models in which agents optimize under intertemporal budget constraints we show that time series studies have estimated misspecified equations and that cross section studies are seriously flawed because they neglect dynamics as a result the puzzle may turn out to be an artifact caused by measurement errors however the significance of reliable measurement of saving investment correlations goes beyond solving the feldstein horioka puzzle because they represent stylized facts open economy models should explain norway serves as a suitable example to cement our methodological arguments with empirical evidence thanks to its system of capital controls which were phased out during the 1970s and 1980s the oil discoveries and its small size we demonstrate that the failure to take structural breaks into account seriously distorts the picture making a strong case for careful diagnostic testing our main empirical result is that the feldstein horioka puzzle does not exist for norway the paper proceeds as follows in section ii we briefly summarize the state of the discussion regarding feldstein and horioka s findings in section iii we derive our specification from the theory compare it to the previous specifications and discuss how to make inferences about capital mobility in section iv we sketch major developments in the post war norwegian economy notably the abolition of capital controls and the emergence of the important oil sector section v presents the empirical results section vi summarizes and concludes ii the feldstein horioka puzzle many authors have confirmed feldstein and horioka s result of a high and stable correlation of saving and investment for oecd countries both in cross country studies and in time series studies

trying to explain home bias in equities and consumption investors hold a substantially larger proportion of their wealth portfolios in domestic assets than standard portfolio theory would suggest a phenomenon called equity home bias in the absence of this bias investors would optimally diversify domestic output risk using foreign equities therefore consumption growth rates would tend to co move across countries even when output growth rates do not empirically however consumption growth rates tend to have a lower correlation across countries than do output growth rates a phenomenon i call consumption home bias in this paper i discuss these two biases and their potential relationship as suggested by the literature

what do saving investment relationships tell us about capital mobility abstract this paper re examines the tests of international capital mobility based on saving investment regressions originated by feldstein while analyses of various measures of capital controls provide some support for the feldstein hypothesis it is shown that the existence of nontraded goods can independently lead to a saving investment correlation this theoretical critique is supported empirically an analysis of the stability of the coefficients resolves the oft reported puzzle in the literature that economies appear to have become increasingly closed financially over time

transaction costs and international portfolio diversification abstract this paper employs an intertemporal portfolio choice model that incorporates proportional transaction costs to examine two features of portfolio allocation the domestic bias of equity holdings and the relationship between domestic and international turnover rates the model implies that the rate of portfolio diversification decreases as the magnitude of the transaction costs increases as costs increase active portfolio reallocation decreases and is replaced by passive portfolio reallocation which is costless and is accomplished through the realization of capital gains the international turnover rate is greater than the domestic turnover rate because the average holdings of the international asset are small not because the volume of trading is large

deviations from purchasing power parity and capital flows abstract this article examines the implications of deviations from purchasing power parity ppp for an investor s portfolio decision and the consequent capital flows in a two country intertemporal model with complete financial markets in the presence of deviations form ppp investors from different nations hold disparate portfolios and the equilibrium that results is not a pooling one we solve eplicitly for asset demands and derive the relationship between the direction of capital flows and deviations from ppp in contrast to the small country assumption in the existing literature the world interest rate in this model is determined endogenously

the market reaction to international cross listings evidence from depositary receipts abstract this paper examines the stock price impact of international dual listings the sample consists of 181 firms from 35 countries that instituted their first depositary receipt program over the period 1985 1995 the market reaction to a depositary receipt program is larger in magnitude and more pervasive than previously reported the stock price reaction is related to choice of exchange geographical location i e emerging or developed markets and avenues for raising equity capital i e public versus private offerings

home bias in equity portfolios inflation hedging and international capital market equilibrium we test whether the home bias in equity portfolios is caused by investors trying to hedge inflation risk the empirical evidence is consistent with this motive only if investors have very high levels of risk tolerance and equity returns are negatively correlated with domestic inflation we then develop a model of international portfolio choice and equity market equilibrium that integrates inflation risk and deadweight costs using this model we estimate the levels of costs required to generate the observed home bias in portfolios consistent with different levels of risk aversion for a level of risk aversion consistent with standard estimates of the domestic equity market risk premium these costs are about a few percent per annum greater than observable costs such as withholding taxes thus the home bias cannot be explained by either inflation hedging or direct observable costs of international investment unless investors have very low levels of risk aversion article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

evaluating the impacts of foreign direct investment aid and saving in developing countries abstract we develop an open economy model to demonstrate how saving aid and direct investment inflows affect investment under asymmetric information the model that relates a firm s net worth to investment suggests that the relative impact of these financial sources depends on a country s income level financial structure and governance infrastructure we estimate the impact of each source using panel data for 64 developing countries the results provide support for the view that net worth matters and suggest that the influence of financial systems can explain why saving investment correlations are high for developed countries and lower for developing countries

international capital mobility what do national saving investment dynamics tell us abstract we interpret the relationship between national saving and investment in the long run as reflecting a solvency constraint and interpret the ease with which a country can run current account imbalances in the short run before it has to ultimately reverse the transaction at some future date to satisfy the solvency constraint as being positively related to the degree of international capital mobility we apply panel error correction techniques to data for 20 oecd countries from 1960 to 1999 we find that saving and investment display a long run cointegration relationship that is consistent with the interpretation that a long run solvency constraint is binding for each country over time however deviations from this long run equilibrium relation have become more persistent which suggests that capital mobility has increased

saving investment correlations in developing countries abstract many studies report that the regression coefficient of saving on investment is small in developing countries we demonstrate that this finding and higher saving investment correlations in oecd countries can be explained by differences in financial structure across countries

are saving and investment cointegrated the case of malaysia 1965 2003 this article examines whether domestic saving rate leads to higher domestic investment rate in the case of malaysia we argue that the results obtained from cross sectional studies are not able to address this issue satisfactorily and highlight the importance of individual country case studies using the recently developed autoregressive distributed lag bounds testing procedure the results reveal a robust cointegrated relationship between domestic saving and investment rates during the period 1965 to 2003

uncertainties in future energy demand in uk residential heating fossil fuels are the main source of space heating in the uk and therefore climate mitigation implies a systemic change in space heating systems the challenge is difficult because of an inefficient building stock and high penetration of natural gas we present new quantified scenarios for residential energy use in the uk to 2050 with minimal policy intervention the uk will remain locked into a gas based heating system which would conflict with the policy goal of decarbonisation however there is a range of scenarios in which this is avoided a system heavily reliant on heat pumps powered by low carbon electricity is uk policy makers currently preferred alternative we conclude that some shift in this direction is likely to be required but complete reliance on this solution raises a number of problems greater use of energy efficiency and biomass can also play a significant role these options have different risks but a more diversified strategy would be more prudent we conclude that the future of uk residential space heating is very uncertain but meeting low carbon heating goals is better conceptualised as reducing reliance on gas rather than necessarily mass electrification our analysis has implications for any country with high use of fossil fuels in space heating and ambitious decarbonisation goals

the feldstein horioka puzzle and spurious ratio correlation abstract this study shows that the feldstein horioka puzzle resembles a spurious ratio correlation due to a common deflator pearson 1896 7 empirically the feldstein horioka specification and its counterpart with an arbitrary deflator final domestic demand give similar results monte carlo results also indicates that the slope and r 2 of the ratio regression are upward biased theoretically assuming each of the original undeflated variables are linear homogeneous functions of the deflator and random disturbances formulas for and r 2 are derived as saving and investment rates are numerically small relative to the disturbances both and r 2 are predominantly determined by the disturbances and they tend towards unity when the disturbances are close in magnitude the feldstein horioka results are therefore noisy though not entirely spurious and do not necessarily reflect a strong correlation between investment and savings

international intertemporal solvency in industrialized countries evidence and implications recent large current account deficits among industrialized countries have caused concern for policy makers some believe for example that the current buildup of claims on the u s by foreigners violates her solvency condition with respect to the rest of the world recent research 22 suggests that for a country s intertemporal solvency condition to hold the change in the country s obligations to the rest of the world i e her current account deficit must be stationary stationarity tests on current accounts were performed for the u s by trehan and walsh 22 and wickens and uctum 23 for the u s and canada by otto 15 and for twenty three countries by gundlach and sinn 10 these papers present evidence that current accounts are non stationary for several major industrialized countries including the u s the u k canada germany and japan these findings do not favor international intertemporal solvency for this reason the issue merits further investigation in this paper we test for the stationarity of current account deficits of the group of seven industrialized countries preliminary results confirm many of gundlach and sinn s 10 findings however several events during the 1980s might have caused discrete breaks in current account balances events potentially linked with current account breaks include the reduction in world inflation tax reduction and reform in the u s and other industrialized countries attempts at international macroeconomic coordination i e the plaza accord and shifts in the after tax rate of return on capital in many countries as shown in recent research on gross national product 16 2 if such breaks are not accounted for stationarity tests will be biased in favor of accepting the null hypothesis of non stationarity our results suggest strong evidence of discrete breaks in the u s and japan and some evidence favoring breaks in the u k germany and canada the break in the u s current account appears to occur in 1983 while breaks in the other countries appear to occur somewhat later between late 1984 and 1987 more importantly once these breaks are incorporated the evidence is more favorable toward the stationarity of current accounts in these countries these findings thus support intertemporal solvency for these countries

saving investment correlations and capital mobility on the evidence from annual data this paper evaluates the use of saving investment correlations to measure capital mobility it is argued that the intertemporal approach to the balance of payments predicts that the practice of calculating the correlation coefficient using long term averages of saving and investment shares biases the result toward accepting the hypothesis of capital immobility calculations based on annual data show that the correlation coefficient is much lower and that is varies considerably estimates of intranational capital mobility based on saving and investment shares of u s federal states show that the saving and investment link is much looser within a nation than among nations copyright 1992 by royal economic society

on the effects of barriers to international investment a simple model is presented in which it is costly for domestic investors to hold foreign assets the implications of the model for the composition of optimal portfolios at home and abroad are derived it is shown that all foreign assets with a beta larger than some beta plot on either one of two security market lines some foreign assets with a beta smaller than are not held by domestic investors even if their expected return is increased slightly while it is obviously not true that asset markets are completely segmented between countries there is evidence of barriers to international investment although reality seems to lie in that grey area between complete segmentation and no segmentation at all most international asset pricing models are concerned with the extreme case of no barriers to international investment no effort seems to have been made to study the effect on portfolio choice of such barriers which make it costly to hold foreign securities as opposed to domestic securities but which do not in general render international diversification so onerous that investors avoid foreign securities completely casual empiricism suggests that models without barriers to international investment should be suspect those models cannot explain why it appears that in every country investors on average hold more domestic securities than would be required if they held the world market portfolio 2 this paper constructs a model of international asset pricing in which there is a cost associated with holding either long or short risky foreign securities for the sake of simplicity in most of the paper we assume that while domestic investors face barriers to international investment foreign investors face no such barriers it turns out that nothing significant is lost with such an assumption the main conclusions of this paper for the case in which foreign investors face no barriers to international investment are 1 in the presence of barriers to international investment some risky foreign

daily cross border equity flows pushed or pulled we investigate the conditions under which an intertemporal equilibrium model based on investors portfolio decisions can explain the dynamics of high frequency equity flows our model shows that w

are saving and investment cointegrated another look at the data abstract in his paper are saving and investment co integrated economics letters 27 pp 31 34 miller finds that u s saving and investment rates were cointegrated during the post wwii fixed exchange rate regime and not cointegrated during the flexible exchange rate regime miller did not take into account the fact that both of these rates have non zero means once this is taken into account i find that his results no longer hold i also find that the levels of saving and investment are not cointegrated during either the fixed or flexible exchange rate regimes these findings cast doubt on whether or not this technique can shed light on international capital mobility

financial liberalization and adjustment the cases of chile and new zealand abstract this paper analyzes macrodynamic adjustments during financial liberalization in chile and new zealand during the adjustment to more open capital accounts in the late 1970s or mid 1980s both countries experienced a real exchange rate appreciation and a collapse of net exports while domestic interest rates slowly converged to international levels this paper develops and estimates a two sector dynamic model with current and time varying parameter techniques the domestic interest rate is relatively more responsive to shocks under imperfect capital mobility while the real exchange rate becomes more responsive under perfect mobility therefore capital account liberalization does not eliminate but rather shifts volatility from the domestic interest rate to the real exchange rate jel e65 f33

stress testing the equity home bias a turnover analysis of eurozone markets abstract shifts in equity turnover happen on and around holidays because rationally bounded investors become distracted their pattern reveals a persistent equity home bias even in the eurozone a stress test case for the survival of this bias given the high level of economic and financial development and integration in this area the bias is greater for small caps because investors are reluctant to hold this class of foreign asset our study corroborates calendar anomalies in trading volumes but refutes the hypothesis regarding turnover sensitivity to stock returns common in the empirical and theoretical literature based on investor heterogeneity and short sale constraints our results reveal vanishing cost asymmetries in taking long rather than short positions

unit root tests of the current account balance implications for international capital mobility the extent of international capital mobility is assessed in a time series context the possibility that the current account balance of different 0ecd countries contains a unit root is explored it is shown that if the ratio of the current account balance to gdp is found to be integrated of the order of one the country is likely to be part of the world capital market the results for the whole period 1950 1988 indicate that the current account balance of at least germany japan and the united states contains a unit root considering the subperiods before and after 1972 it is shown that international capital mobility increased after the breakdown of the bretton woods system

arbitrage equilibrium with transaction costs the general topic of this paper is the transmission of disturbances in asset markets the specific topic is the role of transaction costs in this transmission do high transaction costs shelter a market against foreign disturbances while bottling up domestic disturbances at home the question is considered in the context of a small scale general equilibrium model of asset arbitrage with quadratic transaction cost functions the main conclusion is that the transmission of disturbances depends more on the relationships between different transaction cost rates than on their absolute level a progressive decline of transaction costs therefore does not necessarily strengthen the transmission of disturbances nor can artificial increases of transaction costs be relied upon to reduce it copyright 1994 by ohio state university press

pricing capital assets in an international setting an introduction this paper shows how differences across countries of 1 inflation rates 2 consumption baskets of investors and 3 investment opportunity sets of investors matter when one applies capital asset pricing models in an international setting in particular the fact that countries differ is shown to affect the portfolio held by investors the equilibrium expected returns of risky assets and the financial policies of firms

what factors drive systemic risk during international financial crises abstract we analyze the determinants of the contribution of international banks to both global and local systemic risk during prominent financial crises we find no empirical evidence supporting conjectures that bank size leverage non interest income or the quality of the bank s credit portfolio are persistent determinants of systemic risk across financial crises in contrast our results show that global systemic risk in particular is predominantly driven by characteristics of the regulatory regime we also confirm for the subprime crisis that the banks contribution to moderately bad tail events in the past predicts the financial sector s crash risk

integration vs segmentation in the canadian stock market this paper examines the issue of integration versus segmentation of the canadian equity market relative to a global north american market we compare the international and domestic versions of the capm and find that integration or the mean variance efficiency of the global market index is rejected by the data segmentation is the preferred model based on a maximum likelihood procedure correcting for thin trading we further divide the sample into securities that are interlisted in canada and the u s and those that are not integration is rejected for both groups which indicates that the source of segmentation can be traced to legal barriers based on the nationality of issuing firms empirical studies of international capital markets have left the issue of segmentation versus integration largely unresolved yet the question of national or international pricing of assets has crucial implications for financial decisions if national stock markets are segmented then international portfolios should display superior risk adjusted performance because some of the priced domestic systematic risk is diversifiable also with segmentation many irrelevance propositions for corporate financial strategy break down home firms face optimal hedging decisions as well as optimal foreign versus home borrowing decisions finally criteria for capital budgeting decisions will be quite different under national and international pricing the purpose of this paper is to shed some light on this integration versus segmentation question for the canadian equity market vis a vis a global north american market in this paper integration is defined2 as a situation where investors earn the same risk adjusted expected return on similar financial instruments in different national markets the key problem of course is the pricing

taxation of asset income in the presence of a world securities market abstract this paper examines a capm model of world security prices in which governments recognize their ability to influence international security prices via their tax treatment of foreign and domestic investors in this model governments have the incentive to set tax rates such that investors tend to specialize in domestic securities and to restrict net capital flows between countries each country does this to increase the utility of domestic residents taking as given the tax policies of other governments but the net outcome is a reduction in world efficiency and likely a reduction in the utility of all investors

equity home bias and corporate disclosure abstract i show that more comprehensive corporate disclosure reduces investors uncertainty about domestic companies payoffs at no cost thereby decreasing investors equity home bias toward a country since investors should base their investment decisions on valid and easily interpretable company information only more comprehensive disclosure will reduce the home bias only if domestic securities law is sufficiently stratified and domestic companies use international accounting standards using panel data for 38 countries from 2003 to 2008 i find that more comprehensive disclosure reduces investors home bias though significantly only for countries that sufficiently enforce their securities law and implement international accounting standards

domestic saving and international capital movements in the long run and the short run the evidence and analysis in this paper support the earlier findings of feldstein and horioka 1980 that sustained increases in domestic savings rates induce approximately equal increases in domestic rates of investment new estimates for the post opec period 1974 79 imply that each extra dollar of domestic saving increases domestic investment by approximately 85 cents in a sample of 17 oecd countries an explicit analysis of the problems of identification and simultaneous equations bias suggests that the regression estimates are more relevant as a guide to the long run response of international capital flows than to their short run behavior coefficient estimates based on annual variations in savings and investment are subject to potentially severe simultaneous equations bias that is not present when annual observations are averaged over a decade or more and the regression is estimated with a cross country sample of these averages a portfolio model of international capital allocation that is presented in the paper indicates that the short run change in the rate of net foreign investment in response to a sustained increase in domestic saving is likely to be substantially greater than the ultimate steady state response this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item

exchange rate mean reversion from real shocks within an intertemporal equilibrium model abstract the post bretton woods era has been characterized by real exchange rates that exhibit mean reversion with mixed evidence as to whether this reversion is partial ppp never holds or essentially complete this paper generates these stylized facts theoretically by synthesizing a simple intertemporal open economy model with the elasticities approach to the current account a central feature of the model is the existence of non traded goods the model can generate partial or approximately complete mean reversion for the real exchange rate depending on parameter values if innovations in output are made up of permanent and temporary components in addition temporary output shocks generate a type of hysteresis wherein the short run path for the exchange rate permanently alters its long run equilibrium value

the international allocation of savings with quadratic transaction or risk costs abstract quadratic transaction costs are used to explain to what extent the savings of a country are invested in the same country and to what extent they give rise to international capital flows more specifically it is shown that the high across countries correlation between saving and investment observed by feldstein and horioka could at least in part result from differences in transaction costs between internal and external investments this remains true even in the presence of an international asset without such differences in the particular model used transaction costs cannot be distinguished from risk jel f21

confidence in the familiar an international perspective one striking feature of intemrnational portfolio investment is the extent to which equity portfolios are concentrated in the domestic equity market of the investor the home bias puzzle i examine the role of investors perception of foreign investment risk on their portfolio choices the expected retumrns and risk of foreign investment are specified through an asset pricing model with the home portfolio being the benchmark asset pastor s 2000 domestic capm the model serves as a reference point around which investors can center their prior beliefs i focus on investors prior beliefs that are consistent with the literature on confidence in the familiar foreign equities in terms of both expected returns and risk being viewed less favorably than domestic equities these prior beliefs are then combined with the data on g7 equities and the revised beliefs are used to obtain the global optimal asset allocation to hold predominantly domestic equities each g7 investor has to believe that the risk of foreign investment is several times higher than the actual risk the home bias is more of a puzzle for a u s investor during the 1970s specifying investors prior beliefs around the world capm does not help resolve the puzzle

saving taxes through foreign plant ownership this paper analyzes to which extent foreign plant ownership involves lower tax payments than domestic plant ownership we employ a model of endogenous foreign subsidiary ownership to derive a set of empirically testable hypotheses about the differential taxation of foreign and domestically owned subsidiaries we assess these hypotheses in a data set of 33 577 european foreign and domestically owned manufacturing plants we identify a significant tax saving of endogenous foreign owner ship on average foreign owners pay 594 euros per employee or about 56 percent less than domestic owners of similar subsidiaries this effect is larger in thinner markets with fewer plants in markets with a greater relative presence of foreign owners and for foreign owners of larger plants

capital mobility and the relationship between saving and investment rates in oecd countries abstract this paper considers tests that use data on saving and investment rates to determine the degree of international capital mobility two types of evidence are presented to show that a high correlation between saving and investment rates across oecd countries can be consistent with a high degree of capital mobility this evidence qualifies the conclusions of previous studies and casts doubt on the usefulness of testing hypotheses about capital mobility with data on saving and investment rates

estimating saving investment correlations evidence for oecd countries based on an error correction model abstract saving investment correlations are important stylized facts in open economy macroeconomics and indicators of capital mobility they are best estimated by an error correction model ecm because an ecm is consistent with intertemporal general equilibrium models the ecm is a synthesis of previous approaches applying the ecm to the oecd countries we find that in general saving and investment are cointegrated the ecm is more powerful in detecting cointegration than the two step engle granger procedure estimates of the saving investment correlation are robust with respect to overdifferencing we find evidence of a large country effect and an increase in capital mobility within the oecd area

productivity shocks non traded goods and optimal capital accumulation this paper considers the interaction of saving and investment in determining the current account for a small open economy subjected to productivity shocks by emphasizing the distinction between traded and non traded goods the analysis highlights the crucial role of the real exchange rate in macroeconomic adjustment our results demonstrate the importance of intertemporal substitution for determining the response of investment to anticipated productivity disturbances we also show how the correlation of movements in saving and investment following an anticipated disturbance depends critically on relative sectoral factor intensities

the saving investment correlation puzzle is still a puzzle abstract a number of simulation studies claim to have solved the feldstein horioka puzzle by demonstrating that a high time series correlation between saving and investment naturally arises from business cycle shocks this paper uses panel data of saving and investment controlled for business cycle shocks to empirically test the significance of cyclical shocks productivity fiscal and the terms of trade shocks in explaining a high saving investment correlation the estimation results reveal that conventional aggregate shocks only partially explain the high saving investment correlation moreover country differences in the size of the gnp and the non traded sector do not significantly affect the saving investment correlation the saving investment correlation puzzle remains a puzzle after all

on the determinants of net foreign investment these models do not explain why investments in productive processes in any country exceed or fall short of the wealth of the residents of that country most existing models of portfolio choice and asset pricing make the key assumption of a given world market portfolio which implies that at any point in time net foreign investment itself is given 2 the present paper does not make this assumption this paper provides a simple model of net foreign investment in a world of perfect markets 3 the model has the useful property that production decisions are made simultaneously with portfolio choice decisions as in cox ingersoll and ross 1978 the central feature of the model is that technologies in use differ across countries it is assumed that pre existing capital can be shifted costlessly between countries production decisions in other words decisions about how the existing stock of capital is invested among available technologies determine net foreign investment in the home country however production decisions depend on the distribution of the returns to investments in various technologies whereas this paper analyzes an issue which has always been of considerable interest in the field of international finance it uses a different framework from that used in most of the literature on net capital flows it recognizes explicitly the role of risk as a determinant of net foreign investment 4 because political risk is not modeled explicitly this paper constitutes only a first attempt at understanding the determinants of net foreign investment political risk must play a significant role as a determinant of net foreign investment because net university of rochester i am grateful to the members of the international finance seminar at the university of rochester to jorge de macedo ron jones don lessard and especially pat reagan for useful conversations and comments and to the center for research in government policy and business for financial support net foreign investment in the domestic country is understood to mean the difference between total wealth invested in the domestic country and domestic wealth it follows that net foreign investment is a stock and not a flow international economists would call net foreign investment the

corporate taxation of heterogeneous firms and the welfare effects of labour unions this paper examines the welfare effects of powerful labour unions when the government levies a uniform tax rate as is currently the case in most oecd countries and firms are heterogeneous with respect to productivity i show that an increase in the bargaining power of labour unions can decrease the welfare loss generated by restriction of the tax policy and provide conditions under which powerful labour unions decrease the likelihood that firms will move abroad i also reproduce the well known effect whereby powerful labour unions decrease corporate tax rates if firms are mobile

the only game in town stock price consequences of local bias abstract theory suggests that in the presence of local bias the price of a stock should be decreasing in the ratio of the aggregate book value of firms in its region to the aggregate risk tolerance of investors in its region using data on u s states and census regions we find clear cut support for this proposition most of the variation in the ratio of interest comes from differences across regions in aggregate book value per capita regions with low population density e g the deep south are home to relatively few firms per capita which leads to higher stock prices via an only game in town effect

assessing long term energy security the case of electricity in the united kingdom there is a growing body of research into the potential security risks and trade offs which may emerge over the long term development of energy systems as part of this body of research this paper aims to develop and demonstrate a set of indicators for assessing the security of long term national electricity scenarios this paper extends the empirical work of existing frameworks by including reliability and cost parameters alongside a range of other important aspects of energy security such as diversity trade and acceptability and by using both qualitative and quantitative indicators without aggregation in order to identify trade offs this paper uses the indicators to assess the energy security implications of three plausible long term scenarios for the uk electricity system the results indicate that a major risk may be experienced by a lack of flexible responsive supply capacity in low carbon electricity pathways reducing overall energy demand is found to be the most beneficial policy for improving energy security in terms of generating benefits in multiple dimensions the paper finds that energy security is often conceptualised as the avoidance of causes of insecurity such as insecure fuel imports but that an equally important aspect of security lies in maximising responses to insecurity for example by increasing the flexibility and responsiveness of both supply and demand

uk energy policy stuck in ideological limbo energy policy in the uk has undergone a paradigm change over recent decades from the free market stance of the 1990s to the more interventionist measures of the 21st century however the two approaches have not been reconciled even as the government intervenes it reaffirms its goal of creating more competitive markets the contradictions are most apparent with electricity which has been the main focus of intervention to date in line with decarbonisation strategy investment is dependent on government support which changes in response to circumstances creating uncertainty and undermining the basis of market operation so leading to the need for more intervention the future for other sources natural gas nuclear power and carbon capture and storage in particular remains unclear the government risks getting the worst of both worlds without the coordination and direction which could come from a centralised approach or the efficiencies and innovation which might emerge from a more consistent market based policy unless a fuller policy statement expected later this year can clarify matters uk energy policy will not be fit for purpose and will fail to meet its key goals of economic effectiveness environmental protection and energy security

exchange rate regimes and the feldstein horioka puzzle the french evidence this paper investigates whether the feldstein and horioka economic journal 90 314 329 1980 argument on domestic saving investment relationship is supported by the french data when an endogenous structural break corresponding to a major policy regime change is taken into account the evidence suggests that the saving investment cointegration disappears after the estimated endogenous structural break point in 1973 coinciding with the end of the bretton woods system of fixed exchange rates consistent with a current account targeting policy an investment driven saving process appears to be the case for the fixed exchange rate regime period

partially segmented international capital markets and international capital budgeting abstract evidence suggests that international capital markets are neither fully integrated nor completely segmented there is however currently no general method available for computing the required return on corporate investments in such capital markets this paper uses a model of partially integrated international capital markets to derive optimal international capital budgeting rules we show how capital budgeting rules depend on the level of investor costs to cross border investment both directly and also indirectly through the portfolio specialization they induce we explain how required returns differ for different companies raising capital in such markets and how these costs of capital may be estimated we also explain how these differences in required returns can be consistent with general equilibrium and the effect they have on incentives for foreign direct investment

computing optimal multi currency mean variance portfolios abstract the paper provides an exact and computable solution to the general quadratic mean variance problem with exchange rate and return uncertainties multiple currencies are considered with multiple investments in each currency the classical mean variance formulation is augmented with currency risk the overall risk is hence the multiplicative effect of return risks within a currency and the currency risk currency risk may be interpreted in terms of though not restricted to past forecast errors we provide a framework within a general structure for return and exchange rate forecasts and risks we show that the quadratic mean variance structure is maintained and provide solutions to computational questions in the evaluation of the optimal portfolio by extending conventional analysis we arrive at a surprisingly simple solution which may be a useful addition to the arsenal of finance techniques

a general equilibrium model of international portfolio choice we investigate in a two country general equilibrium model whether a bias in consumption towards domestic goods will necessarily lead to a preference for domestic securities we develop a model where investors are constrained to consume only from their domestic capital stock and where it is costly to transfer capital across countries in this model investors less risk averse than an investor with log utility bias their portfolios towards domestic assets investors more risk averse than log however prefer foreign assets thus this model suggests that it is unlikely that the portfolios observed empirically can be explained by the high proportion of domestic goods in total consumption we investigate in a two country general equilbrium model whether a bias in consumption toward domestic goods will necessarily lead to a preference for domestic assets in an investor s optimal portfolio we constrain investors to consume only from their domestic capital stock and introduce a proportional cost for transferring goods from one country this cost gives rise to endogenous deviations from the law of one price lop thus the home and foreign investors do not hold identical portfolios we show that an investor s optimal portfolio is biased towards domestic equity only if she is less risk averse than an investor with log utility investors with relative risk aversion greater than one exhibit a preference for the foreign asset this is because the exchange rate derived endogenously is negatively correlated with the return on the foreign asset and therefore the translated return on the foreign stock is less risky than that on the domestic stock thus the results of this model suggest that it is unlikely that the preference for domestic assets that is observed empirically can be explained by the high proportion of domestic goods in total consumption there exists a considerable body of literature documenting the gains from international diversification grubel 1968 was the first to propose that international diversification allows investors to attain lower return variances than those achievable by diversifying domestically this proposition relies on the correlation between stock indices across countries being significantly less

the puzzling evolution of the home bias information processing and financial openness abstract this paper explains the home equity bias and its puzzling evolution in a model where investors face an information constraint and have an initial local informational advantage after financial liberalization local investors have a magnified informational advantage since information processed under autarky remains useful after liberalization a gradual shift towards foreign assets occurs as the relevance of autarkic information declines over time in the long run home bias remains large due to the interaction between information and portfolio choices empirical evidence supports the main predictions of our model namely that bias increases with information capacity and decreases with financial openness

vignettes on the world capital market this paper is motivated by a sense that we as a profession need to understand much better than we now do how the world capital market works we seem to be genuinely schizophrenic in the ways we build models many of them are closedeconomy models in which the rest of the world does not even appear yet others of them are models of the small open economy in which hardly any degree of freedom is left for economic policy to influence events lying behind the schizophrenia is i believe a genuine ignorance on our collective part of how the world capital market

government as a discriminating monopolist in the financial market the case of china abstract we show that the many unusual features of china s financial markets are consistent with a government choosing regulations to maximize a standard type of social welfare function under certain conditions these regulations are equivalent to imposing explicit taxes on business and interest income yet should be much easier to enforce the observed implicit tax rates are broadly in line with those observed in other countries the theory also forecasts however that china will face increasing incentives over time to shift to explicit taxes

why do governments subsidise investment and not employment abstract the governments of nearly all industrialised countries use subsidies to support the economic development of specific sectors or regions with high rates of unemployment conventional economic wisdom would suggest that the most efficient way to support these regions or sectors is to pay employment subsidies we present evidence showing that capital subsidies are empirically much more important than employment subsidies we then develop a simple model with unemployment to explain this phenomenon in our model unemployment arises due to bargaining between unions and heterogenous firms that differ with respect to their productivity union bargaining power raises wage costs and leads to a socially inefficient collapse of low productivity firms and a corresponding job loss union firm bargaining also gives rise to underinvestment it turns out that an investment subsidy dominates an employment subsidy in terms of welfare if there is bargaining over wages and employment on the firm level if bargaining is over wages only results are ambiguous but capital subsidies may still be preferable

globalization and the feldstein horioka puzzle capital account liberalization and the integration of world financial markets should increase capital mobility across countries this article uses the feldstein horioka savings investment methodology to examine the impact of economic globalization on the degree of capital mobility in 99 countries over the period 1970 to 2005 our findings suggest that economic openness and financial market integration have led to increased capital mobility in developed as well as developing countries however their effect appears to be larger for the latter this also implies that countries with more financial openness can run higher current account deficits due to better access to external capital markets our results also support the previous findings that foreign aid supplements domestic savings for investment in developing countries