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Financial Markets And International Risk Sharing In Emerging Market Economies

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  • Martin Schmitz

Abstract

In light of rapidly increasing foreign equity liability positions of emerging market economies, we test for a necessary condition of international risk sharing, namely for systematic patterns between idiosyncratic output fluctuations and financial market developments. Panel analysis of 22 emerging market economies shows strong evidence for pro-cyclicality of capital gains on domestic stock markets both over short and medium term horizons. This implies that domestic output fluctuations can be hedged through cross-border ownership of financial markets. JEL Classification: F21, F30, G15

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Bibliographic Info

Article provided by John Wiley & Sons, Ltd. in its journal International Journal of Finance & Economics.

Volume (Year): 18 (2013)
Issue (Month): 3 (07)
Pages: 266-277

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Handle: RePEc:wly:ijfiec:v:18:y:2013:i:3:p:266-277

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  1. Alberto Alesina & Guido Tabellini, 2005. "Why Is Fiscal Policy Often Procyclical?," Working Papers 297, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  2. Philip R. Lane & Gian Maria Milesi-Ferretti, 2006. "The External Wealth of Nations Mark II: Revised and Extended Estimates of Foreign Assets and Liabilities,1970–2004," The Institute for International Integration Studies Discussion Paper Series, IIIS iiisdp126, IIIS.
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  4. Chen, Nai-Fu & Roll, Richard & Ross, Stephen A, 1986. "Economic Forces and the Stock Market," The Journal of Business, University of Chicago Press, University of Chicago Press, vol. 59(3), pages 383-403, July.
  5. André Faria & Philip R. Lane & Paolo Mauro & Gian Maria Milesi-Ferretti, 2007. "The Shifting Composition of External Liabilities," Journal of the European Economic Association, MIT Press, MIT Press, vol. 5(2-3), pages 480-490, 04-05.
  6. Forster , Katrin & Vasardani, Melina A. & Ca' Zorzi, Michele, 2011. "Euro area cross-border financial flows and the global financial crisis," Occasional Paper Series 126, European Central Bank.
  7. Lane, Philip R., 2003. "The cyclical behaviour of fiscal policy: evidence from the OECD," Journal of Public Economics, Elsevier, Elsevier, vol. 87(12), pages 2661-2675, December.
  8. Faruk Balli & Sebnem Kalemli-Ozcan & Bent Sorensen, 2011. "Risk Sharing through Capital Gains," NBER Working Papers 17612, National Bureau of Economic Research, Inc.
  9. Martin Schmitz, 2007. "Financial Markets and International Risk Sharing," The Institute for International Integration Studies Discussion Paper Series, IIIS iiisdp233, IIIS.
  10. Marianne Baxter, 2011. "International Risk Sharing in the Short Run and in the Long Run," NBER Working Papers 16789, National Bureau of Economic Research, Inc.
  11. Bracke, Thierry & Schmitz, Martin, 2008. "Channels of international risk-sharing: capital gains versus income flows," Working Paper Series, European Central Bank 0938, European Central Bank.
  12. Devereux, Michael B. & Sutherland, Alan, 2009. "A portfolio model of capital flows to emerging markets," Journal of Development Economics, Elsevier, Elsevier, vol. 89(2), pages 181-193, July.
  13. Kose, M. Ayhan & Prasad, Eswar S. & Terrones, Marco E., 2009. "Does financial globalization promote risk sharing?," Journal of Development Economics, Elsevier, Elsevier, vol. 89(2), pages 258-270, July.
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