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Banks in Space: Does Distance Really Affect Cross-Border Banking?

During the last years, gravity equations have leapt from the trade literature over into the literature on financial markets. Martin and Rey (2004) were the first to provide a theoretical model for cross-border asset trade, yielding a structural gravity equation that could be tested empirically. In this paper, I use a gravity model to evaluate factors that affect cross-border banking. Furthermore, I extend the baseline model to allow for third-country effects, which have been shown to matter for international trade, using spatial econometric techniques. I try to answer the following question: First, is there a spatial dimension in cross-border banking? Second, if so, has it changed over time, and third, what happens if this spatial dimension is ignored? I use bilateral data on cross-border banking assets for 15 countries over the time period 1995-2005, and I estimate cross-section regressions for each year. I find strong evidence for a spatial dimension in crossborder banking. Furthermore, the direct effect of distance decreases signficantly when applying spatial econometric techniques.

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File URL: http://www.iaw.edu/RePEc/iaw/pdf/iaw_dp_70.pdf
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Paper provided by Institut für Angewandte Wirtschaftsforschung (IAW) in its series IAW Discussion Papers with number 70.

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Length: 30 pages
Date of creation: Feb 2011
Handle: RePEc:iaw:iawdip:70
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  3. Nicola Cetorelli & Linda S Goldberg, 2011. "Global Banks and International Shock Transmission: Evidence from the Crisis," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 59(1), pages 41-76, April.
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  7. Shang-Jin Wei, 1996. "Intra-National versus International Trade: How Stubborn are Nations in Global Integration?," NBER Working Papers 5531, National Bureau of Economic Research, Inc.
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  9. Buch, Claudia M, 2003. " Information or Regulation: What Drives the International Activities of Commercial Banks?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(6), pages 851-869, December.
  10. Robert C. Feenstra & James R. Markusen & Andrew K. Rose, 2001. "Using the gravity equation to differentiate among alternative theories of trade," Canadian Journal of Economics, Canadian Economics Association, vol. 34(2), pages 430-447, May.
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  12. Dennis Novy, 2013. "Gravity redux: measuring international trade costs with panel data," LSE Research Online Documents on Economics 59308, London School of Economics and Political Science, LSE Library.
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  14. Blonigen, Bruce A. & Davies, Ronald B. & Waddell, Glen R. & Naughton, Helen T., 2007. "FDI in space: Spatial autoregressive relationships in foreign direct investment," European Economic Review, Elsevier, vol. 51(5), pages 1303-1325, July.
  15. Peter Egger, "undated". "A Note on the Proper Econometric Specification of the Gravity Equation," WIFO Working Papers 108, WIFO.
  16. Baltagi, Badi H. & Egger, Peter & Pfaffermayr, Michael, 2007. "Estimating models of complex FDI: Are there third-country effects?," Journal of Econometrics, Elsevier, vol. 140(1), pages 260-281, September.
  17. James P. LeSage & R. Kelley Pace, 2008. "Spatial Econometric Modeling Of Origin-Destination Flows," Journal of Regional Science, Wiley Blackwell, vol. 48(5), pages 941-967.
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  19. repec:spo:wpecon:info:hdl:2441/c8dmi8nm4pdjkuc9g708pipbp is not listed on IDEAS
  20. Egger, Peter & Larch, Mario & Pfaffermayr, Michael & Walde, Janette, 2008. "The EU's attitude towards Eastern Enlargement in space," Journal of Comparative Economics, Elsevier, vol. 36(1), pages 142-156, March.
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