Can Cross-Border Funding Frictions Explain Financial Integration Reversals? (with Francesca Carrieri and Aytek Malkhozov)

[Revision Requested By RFS]

Abstract: We examine the role of funding frictions for international investments. Guided by an international CAPM with funding constraints, we infer the magnitude and the implicit cost of barriers that impede the funding of cross-border positions from the dispersion in the performance of betting-against-beta portfolios across countries. We find such cross-border funding barriers to be economically significant. Despite an overall downward trend, our indicator reveals periods when cross-border funding frictions become more severe. These periods coincide with increases in market segmentation documented by the literature but not explained by the variation in other international investment barriers.

Accepted for presentation in: EMG-ECB Workshop on International Capital Flows, London, UK 2018; Fed/UMD Short-Term Funding Markets Conference, Washington DC, USA 2018; Annual Financial Market Liquidity Conference, Budapest, Hungary2017; Financial Management Association International (FMA), Boston, USA 2017; Northen Finance Association (NFA), Halifax, Canada 2017; International Workshop on Financial System Architecture & Stability (IWFSAS), Montreal, Canada 2017; International Finance and Banking Society (IFABS), Oxford, UK 2017;

Abstract: We test a fully conditional, international, intertemporal asset-pricing model. With a large cross-section of developed and emerging markets, we find support for a constant price of currency risk but not for intertemporal risk. Intertemporal risk is priced only conditionally, when time-variation is introduced. This requires disentangling the two, as both factors are likely proxies of the state variables that affect asset prices over time. The fit of the model is mainly improved by currency risk rather than intertemporal risk. However, a model with residual time-varying intertemporal risk in addition to the other factors statistically outperforms the one with currency risk.

Accepted for presentation in: Financial Management Association International (FMA), Florida, USA 2015; European Finance Association (EFA), Vienna, Austria 2015; International Conference of the French Finance Association (AFFI), Cergy, France 2015; European Financial Management Association (EFMA), Breukelen, Netherlands 2015; Midwest Finance Association (MFA), Chicago, USA 2015

available on SSRN (listed on SSRN's Top Ten download list for: Emerging Markets: Finance eJournal). Previously circulated as "Pricing Together Developed and Emerging Markets with Multiple Risk Factors".

Prices of Risk and the Business Cycle, (with Francesca Carrieri)

Abstract: We estimate in a linear regression framework an asset pricing model that is both intertemporal and fully conditional. Using time-varying quantities of risk as regressors, we focus our analysis on the time-varying prices of risk to capture investors’ assessment of the shift in investment opportunities through the economic cycle. Separately with each information variable, we show that the reward for intertemporal risk is decreasing during recessions with the proxy that negatively predicts market returns. This evidence stands opposite to our findings for the compensation for market risk. When combining all information variables we find that in statistical terms the conditional price for intertemporal risk with this proxy is relatively more significant than the price of market risk at the end of an expansion and during recessions. Thus differences in the two sources of risk are heightened in this phase of the cycle since holding assets with weak or negative correlation with the market becomes crucial especially at these times. The relative importance of intertemporal risk in recessions is also supported by the reduction in the unexplained portion of the asset pricing model for those periods.

Accepted for presentation in: Econometric Society World Congress, Montreal, Canada 2015; European Financial Management Association (EFMA), Breukelen, Netherlands 2015

Integrated Markets: Economic or Financial Integration?, (with Lilian Ng and Bruno Solnik) [under review]

Abstract: This study introduces new measures of global economic and financial integration that are based on forward-looking firm-level cash flow forecasts. Analyzing the integration dynamics suggests that economic and financial integration have been increasing across all countries since the start of the 1989-2015 sample period, but have fallen after the global financial crisis. Emerging markets are still lagging behind developed countries in financial integration, but their level of economic integration has converged to that of the developed countries toward the end of the sample period. This is suggestive evidence that the driver of integration for emerging markets is economic rather than financial. Finally, the results show that integration moves at a gradual pace, primarily fueled by fundamental drivers rather than by short-term occurrences.

Accepted for presentation in: Financial Management Association (FMA), San Diego, US 2018; China International Conference in Finance (CICF), Tianjin, China 2018; Asian Finance Association (AsianFA) 2018, Tokyo, Japan 2018; Finance Down Under, Melbourne, Australia 2018; FMA Asia Pacific, Hong Kong, 2018; Conference on Asia-Pacific Financial Markets, Seoul, Korea 2017