Using micro-level data on mutual funds from different financial centers investing in equity and bonds, this paper analyzes how investors and managers behave and transmit shocks across countries. The ...paper shows that the volatility of mutual fund investments is quantitatively driven by both the underlying investors and fund managers through (i) injections into/redemptions out of each fund and (ii) managerial changes in country weights and cash. Both investors and managers respond to country returns and crises and adjust their investments substantially, e.g., generating large reallocations during the global financial crisis. Their behavior tends to be pro-cyclical, reducing their exposure to countries during bad times and increasing it when conditions improve. Managers actively change country weights over time, although there is significant short-run pass-through from returns to country weights. Capital flows from mutual funds do not seem to have a stabilizing role and expose countries in their portfolios to foreign shocks.
► This paper studies how investors and managers react to shocks and crises. ► And the impact on capital flows through international investment allocations. ► Investors inject/redeem money into each fund. ► Managers change country weights and cash. ► Both act pro-cyclically to crises and do not stabilize capital flows.
The coronavirus (COVID-19) pandemic halted economic activity worldwide, hurting firms and pushing many of them toward bankruptcy. This paper discusses four central issues that have emerged in the ...academic and policy debates related to firm financing during the downturn. First, the economic crisis triggered by the pandemic is radically different from past crises, with important consequences for optimal policy responses. Second, it is important to preserve firms’ relationships with key stakeholders (e.g., workers, suppliers, customers, and creditors) to avoid inefficient bankruptcies and long-term detrimental economic effects. Third, firms can benefit from “hibernation,” incurring the minimum bare expenses necessary to withstand the pandemic while using credit to remain alive until the crisis subdues. Fourth, the existing legal and regulatory infrastructure is ill-equipped to deal with an exogenous systemic shock like a pandemic. Financial sector policies can help channel credit to firms, but they are hard to implement and entail different trade-offs.
Gross capital flows: Dynamics and crises Broner, Fernando; Didier, Tatiana; Erce, Aitor ...
Journal of monetary economics,
January 2013, 2013-1-00, 20130101, Volume:
60, Issue:
1
Journal Article
Peer reviewed
Open access
This paper analyzes the behavior of international capital flows by foreign and domestic agents, dubbed gross capital flows, over the business cycle and during financial crises. We show that gross ...capital flows are very large and volatile, especially relative to net capital flows. When foreigners invest in a country, domestic agents invest abroad, and vice versa. Gross capital flows are also pro-cyclical. During expansions, foreigners invest more domestically and domestic agents invest more abroad. During crises, total gross flows collapse and there is a retrenchment in both inflows by foreigners and outflows by domestic agents. These patterns hold for different types of capital flows and crises. This evidence sheds light on the sources of fluctuations driving capital flows and helps discriminate among existing theories. Our findings seem consistent with crises affecting domestic and foreign agents asymmetrically, as would be the case under the presence of sovereign risk or asymmetric information.
► Gross capital flows are large and volatile especially relative to net capital flows. ► When foreigners invest in a country, domestic agents invest abroad, and vice versa. ► International gross capital flows also display a pro-cyclical behavior. ► During expansions, gross flows increase. During crises, they collapse and retrench. ► The results suggest that crises affect foreign and domestic agents asymmetrically.
Benchmark indexes have become important in financial markets for portfolio investment. In this paper, we study how international equity and bond market indexes impact asset allocations, capital ...flows, asset prices, and exchange rates across countries. We use unique monthly micro-level data of benchmark compositions and mutual fund investments during 1996–2014. We find that movements in benchmarks appear to have important effects on equity and bond mutual fund portfolio allocations, including passive and active funds. The effects persist after controlling for time-varying industry-level factors, country-specific effects, and macroeconomic fundamentals. Changes in benchmarks not only impact asset allocations, but also capital flows, abnormal returns in aggregate stock and bond prices, and exchange rates. These systemic effects occur not just when benchmark changes are announced, but also later, when they become effective. By impacting country allocations, benchmarks explain apparently counterintuitive movements in capital flows and asset prices, as well as contagion effects.
•We study how benchmark indexes affect equity and bond mutual fund portfolio allocations across countries•Benchmark indexes impact both passive and active mutual fund portfolios•By affecting portfolios, benchmarks also impact capital flows, asset prices, and exchange rates across countries•Systemic effects occur not just when benchmark changes are announced, but also later, when they become effective•Benchmarks explain apparently counter intuitive movements in capital flows and asset prices, as well as contagion effects
This paper presents novel stylized facts about the rise of the South in global finance using country-to-country data. To do so, the paper assembles comprehensive bilateral data on cross-border bank ...loans and deposits, portfolio investment, foreign direct investment, and international reserves from 2001 to 2018. The main findings are that investments involving the South, and especially within the South, have grown faster than those within the North. By 2018, South-to-South investments accounted for 8% of total international investments, while investments between the South and the North accounted for an additional 26%. The fastest growth occurred in portfolio investment and international reserves, whereas the slowest growth was in banking. These trends are not driven by China, any particular South region, or offshore financial centers. South-to-South investments grew the fastest even after controlling for regional GDP growth. The extensive margin played a significant role in the growth of investments within the South.
•We compiled bilateral data on loans and deposits, portfolio investment, FDI, reserves.•We find that investments involving the South grew faster than those within the North.•Portfolio investment and reserves grew the fastest, loans and deposits the slowest.•These trends are not driven by China, any South region, or offshore financial centers.•By 2018, investments involving the South accounted for 34% of the total.
WHY DO EMERGING ECONOMIES BORROW SHORT TERM? Broner, Fernando A.; Lorenzoni, Guido; Schmukler, Sergio L.
Journal of the European Economic Association,
01/2013, Volume:
11
Journal Article
Peer reviewed
Open access
We argue that one reason why emerging economies borrow short term is that it is cheaper than borrowing long term. This is especially the case during crises, as during these episodes the relative cost ...of long-term borrowing increases. We construct a unique database of sovereign bond prices, returns, and issuances at different maturities for 11 emerging economies from 1990 to 2009 and present a set of new stylized facts. On average, these countries pay a higher risk premium on long-term than on short-term bonds. During crises, the difference between the two risk premia increases and issuance shifts towards shorter maturities. To illustrate our argument, we present a simple model in which the maturity structure is the outcome of a risk-sharing problem between an emerging economy subject to rollover crises and risk-averse international investors.
Emerging market corporations have significantly increased their borrowing in international debt markets since 2008. We provide a detailed dive into this borrowing by showing that it happened in one ...particular market segment. Firms significantly increased their large bond issuances, mostly above US$500 million, which became cheaper to issue. We find a strong clustering of issuances with a face value of exactly $500 million after 2008 compared to developed markets. This suggests increased willingness from investors, especially cross-over investors, to purchase emerging market bonds included in newly created bond indexes, which require a minimum face value of $500 million. However, not all firms could issue such large bonds. Firms large enough to do so faced a trade-off. Issuing index-eligible bonds allowed them to borrow at a lower cost at the expense of accumulating cash. Because of this “size yield discount,” many companies increased their issuances of index-eligible bonds, accumulating cash holdings.
•Study of emerging market corporate borrowing in international markets after 2008.•This borrowing happened in one particular market segment: large bonds above $500 M.•Strong clustering of issuances of exactly $500 M bonds compared to developed markets.•Higher willingness from cross-over investors to purchase bonds included in indexes.•Firms that could issue large bonds faced a trade-off: lower cost but more cash held.
The “conventional wisdom” in academic and policy circles argues that, while large and foreign banks are generally not interested in serving SMEs, small and niche banks have an advantage because they ...can overcome SME opaqueness through relationship lending. This paper shows that there is a gap between this view and what banks actually do. Banks perceive SMEs as a core and strategic business and seem well-positioned to expand their links with SMEs. The intensification of bank involvement with SMEs in various emerging markets is neither led by small or niche banks nor highly dependent on relationship lending. Moreover, it has not been derailed by the 2007–2009 crisis. Rather, all types of banks are catering to SMEs and large, multiple-service banks have a comparative advantage in offering a wide range of products and services on a large scale, through the use of new technologies, business models, and risk management systems.
Capital market financing and firm growth Didier, Tatiana; Levine, Ross; Llovet Montanes, Ruth ...
Journal of international money and finance,
November 2021, 2021-11-00, Volume:
118
Journal Article
Peer reviewed
Open access
This paper studies whether there is a connection between finance and growth at the firm level. It employs a new dataset of 150,165 equity and bond issuances around the world, matched with income and ...balance sheet data for 62,653 listed firms in 65 countries over 1990–2016. Three main patterns emerge from the analyses. First, firms that choose to issue in capital markets use the funds raised to grow by enhancing their productive capabilities, increasing their tangible and intangible capital and the number of employees. Growth accelerates as firms raise funds. Second, the faster growth is more pronounced among firms that are more likely to face tighter financing constraints, namely, small, young, and high-R&D firms. Third, capital market issuances are associated with faster growth among firms located in countries with more developed capital markets relative to banks. Capital markets are also comparatively effective at allowing financially constrained firms to raise capital.
By studying the cross-country incidence of the 2008–2009 global financial crisis, we document a structural break in the way emerging economies responded to the global shock. Contrary to popular ...perceptions, emerging economies suffered growth collapses (relative to the pre-crisis levels) comparable to those experienced by developed economies, even when they continued growing. Afterwards, most economies returned to their pre-crisis growth rates. Although emerging economies were not able to avoid the collapse originated in the U.S. and then transmitted across countries, they were more resilient during the global crisis than during past crises. Namely, they resumed their higher growth rates earlier and converged more quickly to their pre-crisis growth trend. Moreover, breaking with the past, emerging economies did not fall more than developed economies during the global crisis and were able to conduct countercyclical policies, thus becoming more similar to developed economies.
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