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  • Author: William A. Carter, William Crumpler
  • Publication Date: 04-2019
  • Content Type: Working Paper
  • Institution: Center for Strategic and International Studies
  • Abstract: As the threat of cyberattacks has risen in recent years, financial institutions (FIs) and regulators have taken a range of steps to strengthen the security and resilience of the financial system to cyber threats. In the Asia-Pacific region (APAC), regulators have introduced a raft of new regulations and controls to bolster the resilience of FIs in their jurisdictions. While greater attention to—and engagement on—these issues is important, the development of new regulatory regimes across APAC has created challenges for multinational FIs and regulators, and could hinder the growth of the financial services and fintech industries within the region. We reviewed the cybersecurity requirements impacting the financial industry in five key jurisdictions, including the largest regional financial centers and consumer markets in APAC: Singapore, Hong Kong, Japan, China, and India. Through a combination of open-source research and on-the-ground interviews—with regulators; local, regional, and global FIs; policymakers; technology experts; and academics—we sought to understand the range of requirements and approaches from different regulators across the APAC region, and the ways in which they impact cyber risks to the regional financial system. Harmonizing regulators’ approaches to cybersecurity regulation in the region could help reduce systemic risks, improve regulatory efficiency, and make it easier for FIs across APAC to grow. This will not be easy and will require sustained engagement on multiple levels. Cyber threats are a transnational issue and will require a transnational response, particularly in highly integrated regions like APAC. Strengthening the security and resiliency of financial networks across the region will require looking at FIs from an enterprise perspective and understanding the cyber risks they face from the perspective of defenders, not the narrow lens of national borders. This will require principles-based approaches that allow for the wide range of business models and capacities of FIs and regulators across the region, and consolidated auditing, examination, and testing procedures to ensure that regulators have an accurate picture of the risks and controls at institutions under their care. Ultimately, regulators’ goals must be to ensure that strong security and resilience, not redundant compliance, is the focus for FIs.
  • Topic: Security, Cybersecurity, Financial Markets
  • Political Geography: Global Focus
  • Author: Andrew Walter
  • Publication Date: 11-2019
  • Content Type: Working Paper
  • Institution: Centre for International Governance Innovation
  • Abstract: This special report explores the role of emerging-country members in the Basel process, a key aspect of global financial standard setting. It argues that this process has been significantly more politically resilient than adjacent aspects of global economic governance, in part because major emerging countries have perceived continuing “intra-club” benefits from participation within it. Most important among these are learning benefits for key actors within these countries, including incumbent political leaders. Although some emerging countries perceive growing influence over the international financial standard-setting process, many implicitly accept limited influence in return for learning benefits, which are valuable because of the complexity of contemporary financial systems and the sustained policy challenges it creates for advanced and emerging countries alike. The importance of learning benefits also differentiates the Basel process from other international economic organizations in which agenda control and influence over outcomes are more important for emerging-country governments. This helps to explain the relative resilience of the Basel process in the context of continued influence asymmetries and the wider fragmentation of global economic governance. The report also considers some reforms that could further improve the position of emerging countries in the process and bolster its perceived legitimacy among them.
  • Topic: International Trade and Finance, Financial Markets, Global Political Economy, Emerging States
  • Political Geography: Africa, Europe, Asia, South America, Australia, North America, Global Focus
  • Author: Roman Frydman, Nicholas Mangee, Josh Stillwagon
  • Publication Date: 04-2019
  • Content Type: Working Paper
  • Institution: Institute for New Economic Thinking (INET)
  • Abstract: We reveal a novel channel through which market participants’ sentiment influences how they forecast stock returns: their optimism (pessimism) affects the weights they assign to fundamentals. Our analysis yields four main findings. First, if good (bad) “news” about dividends and interest rates coincides with participants’ optimism (pessimism), the news about these fundamentals has a significant effect on participants’ forecasts of future returns and has the expected signs (positive for dividends and negative for interest rates). Second, in models without interactions, or when market sentiment is neutral or conflicts with news about dividends and/or interest rates, this news often does not have a significant effect on ex ante or ex post returns. Third, market sentiment is largely unrelated to the state of economic activity, indicating that it is driven by non-fundamental considerations. Moreover, market sentiment influences stock returns highly irregularly, in terms of both timing and magnitude. This finding supports recent theoretical approaches recognizing that economists and market participants alike face Knightian uncertainty about the correct model driving stock returns.
  • Topic: Economics, Markets, Financial Markets, Econometrics, Stock Markets
  • Political Geography: United States
  • Author: Koketso Molefhi
  • Publication Date: 03-2019
  • Content Type: Working Paper
  • Institution: Botswana Institute for Development Policy Analysis
  • Abstract: The study examines the impact of financial inclusion on employment creation in Botswana using quarterly time series data for the period 2004-2016. Using Autoregressive Distributed Lag (ARDL) model, we find that availability of bank branches, ownership of bank account and borrowing from the commercial bank have a positive impact on employment creation in the short run. Similarly, in the long run, availability of bank branches, ownership of bank account has a positive relationship with employment creation in the long run. Depositors with commercial banks has a negative bearing on employment creation, both in the short run and in the long run. Therefore, policies should be aimed at ensuring easy access into the financial sector by way of reducing costs associated with account opening as well as creating affordable deposit and borrowing windows to the financially excluded groups.
  • Topic: Economics, Labor Issues, Employment, Finance, Financial Markets, Macroeconomics
  • Political Geography: Africa, Botswana
  • Author: Jae Wook Jung, Kyunghun Kim
  • Publication Date: 07-2018
  • Content Type: Working Paper
  • Institution: Korea Institute for International Economic Policy (KIEP)
  • Abstract: Benefits of financial market integration include cheaper and alternative op-tions of saving and borrowing for households and entrepreneurs. In the global financial market, asset choices for households widen so that individu-als can manage their idiosyncratic income risk more effectively. On the other hand, financial market integration makes investors who hold foreign assets more vulnerable to global financial shocks. In the recent financial crisis, finan-cial market distress which initially arose in the U.S. had an enormous impact on the peripheral countries. This example shows that the strong shock prop-agation occurs via integrated financial markets. The existing literature shows that financial market integration has a sizable impact not only on business cycles in the short run, but also on economic growth in the long run. However, there has been little attention to income distribution, specifically in related to the financial market integration. In this paper, we fill the void in the literature by focusing on the following two styl-ized facts: income inequality has been exacerbated in most countries over the past two decades, and the financial market has been integrated across coun-tries during the same period. In particular, we answer three research questions to investigate the relationship between the two facts. First, how does financial market integration affect income inequality? Second, how do financial market integration and financial market development interact to change income ine-quality? Third, what components do theoretical model need to explain the interaction effect of financial market development and integration on income inequality? We test hypotheses that the effect of financial market openness on inequality is conditional on the level of domestic financial market development when the financial market opens. An empirical study with panel data comprised of 174 countries for the period 1995-2017 finds that the overall effect of finan-cial integration on income inequality is nonlinear. Financial market integration creates the intensive and extensive margins of credit supply which may de-pend on the development level of financial market disproportionally. This paper uncovers a novel empirical evidence that financial market integration and financial market development interact to change income inequality. When other things are controlled, the effect of financial market integration on in-come inequality depends on financial market development. In a country with underdeveloped financial market, income inequality gets worse as financial market opens. On the other hand, when financial market is highly developed, the effect of financial market openness on income inequality is mostly insig-nificant in a statistical sense. The results are still valid with different measures of financial market development, integration, and income inequality. We check that the results are robust as an endogeneity issue among financial market development and integration is controlled. We also suggest some important structures for the conventional economic model to account for our empirical finding as theoretical implications. Based on these implications, extensions of the conventional small open economy model with financial constraints having suggested components such as het-erogeneous holdings of foreign assets across income and asset levels and entrepreneurial shocks will be necessary to understand an interaction of fi-nancial market openness and domestic market development on the distribu-tion of income in a country. Our finding also echoes that studying an eco-nomic mechanism in which economic growth, financial market outcomes, and inequality are endogenously determined.
  • Topic: Development, Income Inequality, Financial Markets, Economic Growth, Integration
  • Political Geography: Global Focus
  • Author: Michael Clemens, Jennifer Hunt
  • Publication Date: 05-2017
  • Content Type: Working Paper
  • Institution: Center for Global Development
  • Abstract: An influential strand of research has tested for the effects of immigration on natives’ wages and employment using exogenous refugee supply shocks as natural experiments. Several studies have reached conflicting conclusions about the effects of noted refugee waves such as the Mariel Boatlift in Miami and post-Soviet refugees to Israel. We show that conflicting findings on the effects of the Mariel Boatlift can be explained by a sudden change in the race composition of the Current Population Survey extracts in 1980, specific to Miami but unrelated to the Boatlift. We also show that conflicting findings on the labor market effects of other important refugee waves can be produced by spurious correlation between the instrument and the endogenous variable introduced by applying a common divisor to both. As a whole, the evidence from refugee waves reinforces the existing consensus that the impact of immigration on average native-born workers is small, and fails to substantiate claims of large detrimental impacts on workers with less than high school.
  • Topic: Refugee Issues, Financial Markets, Global Political Economy
  • Political Geography: Global Focus
  • Author: Michael Clemens, Ethan Lewis, Hannah Postel
  • Publication Date: 03-2017
  • Content Type: Working Paper
  • Institution: Center for Global Development
  • Abstract: An important class of active labor market policy has received little rigorous impact evaluation: immigration barriers intended to improve the terms of employment for domestic workers by deliberately shrinking the workforce. Recent advances in the theory of endogenous technical change suggest that such policies could have limited or even perverse labor market effects, but empirical tests are scarce. We study a natural experiment that excluded almost half a million Mexican ‘bracero’ seasonal agricultural workers from the United States, with the stated goal of raising wages and employment for domestic farm workers. We build a simple model to clarify how the labor market effects of bracero exclusion depend on assumptions about production technology, and test it by collecting novel archival data on the bracero program that allow us to measure state-level exposure to exclusion for the first time. We reject the wage effect of bracero exclusion required by the model in the absence of induced technical change, and fail to reject the hypothesis that exclusion had no eect on US agricultural wages or employment. Important mechanisms for this result include both adoption of less labor-intensive technologies and shifts in crop mix.
  • Topic: Labor Issues, Immigration, Financial Markets
  • Political Geography: Mexico
  • Author: Renata Karkowska
  • Publication Date: 11-2017
  • Content Type: Working Paper
  • Institution: Center for Social and Economic Research - CASE
  • Abstract: The goal of this study is to identify empirically how country-level development, taking into account the financial and macroeconomic environment, affect the risk profiles of the banking sector in Europe. Through a dataset that covers 3,399 European banks spanning the period 1996-2011, and the methodology of panel regression, the empirical findings document the heterogeneity of banking risk determinants. I examine the implications of bank leverage that manifest itself as spreading and growing instability. The study contributes to and combines the different strands of literature and understanding of the importance of the links between the variables. It also contributes to the literature by focusing on a group of countries from Central and Eastern Europe and the Commonwealth of Independent States that have not been studied before. The extended model provides a causal link between risk in the banking sector and the growth of the financial market and macroeconomy. I apply four measures of country-level development that are available in previous studies: share of foreign ownership in the banking sector; the financial freedom index; the real growth rate; and stock market capitalization. Using these measures, I obtain different results which highlight the fact that the effect of macroeconomic and financial development on banking sector risk-taking is ambiguous.
  • Topic: Financial Markets, Economic Growth, Banks, Trade Liberalization, Macroeconomics, Trade
  • Political Geography: Europe, Eastern Europe, Central Europe, European Union
  • Author: Hongying Wang
  • Publication Date: 03-2016
  • Content Type: Working Paper
  • Institution: Centre for International Governance Innovation
  • Abstract: In recent years, the world has seen rapid growth in China’s financial reach beyond its borders. Following the announcement of a “going out” strategy at the turn of the century, many Chinese enterprises have ventured to invest and operate abroad. After three decades as primarily a recipient of foreign direct investment (FDI), China has now emerged as a major FDI-originating country as well. Much of China’s foreign aid is closely entangled with its outgoing FDI, and it has also been rising. Since 2013, the Chinese government has been pushing for a new One Belt, One Road (OBOR) initiative, aiming to connect China with countries along the ancient Silk Road and a new Maritime Silk Road via infrastructure investment. In addition, since 2009, China has actively promoted the internationalization of its currency, the renminbi (RMB). There has been a great deal of anxiety about the motivations behind China’s going out policy and its possible international consequences. Many view it as an expression of China’s international ambition and a strategy that threatens the existing international order; however, that is not the whole story. An equally important but often less understood issue is the role of China’s domestic politics and political economy in shaping its new activism in foreign financial policy. Moreover, it is unclear how successful the going out policy is. The complexity of China’s going out policy was the topic for a recent round table discussion hosted by the Centre for International Governance Innovation and the Foreign Policy Institute at the School of Advanced International Studies of Johns Hopkins University in Washington, DC.[1] Participants discussed a number of issues around two broad themes: the impact of domestic political economy on China’s foreign economic policy and the challenges for China’s external financial strategy — in particular, its OBOR initiative.
  • Topic: Markets, Political Economy, Monetary Policy, Infrastructure, Foreign Direct Investment, Financial Markets
  • Political Geography: China
  • Author: Tomoo Kikuch, Takehiro Masumoto
  • Publication Date: 11-2016
  • Content Type: Working Paper
  • Institution: Economic Research Institute for ASEAN and East Asia (ERIA)
  • Abstract: Since 2011, under the Thein Sein government, Myanmar has started to build financial institutions almost from scratch. Japan has played a leading role in this transition, writing off debt, opening the Yangon Stock Exchange, vying for the entry of Japanese banks, and laying out finance-related laws. As in other Southeast Asian countries, Myanmar's oligopolistic economic structure and colonial past present considerable challenges. There is a rich literature on the relationship between well-functioning financial institutions and economic growth, but the causality of this relationship remains inconclusive. This paper examines the preconditions for financial institutions to be a vehicle for Myanmar's development.
  • Topic: International Trade and Finance, Finance, Financial Markets
  • Political Geography: Japan, Myanmar