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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
Date of revision:
Handle: RePEc:iaw:iawdip:70
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  1. Dennis Novy, 2012. "Gravity Redux: Measuring International Trade Costs with Panel Data," CEP Discussion Papers dp1114, Centre for Economic Performance, LSE.
  2. Kalemli-Ozcan, Sebnem & Papaioannou, Elias & Peydró, José-Luis, 2010. "What lies beneath the euro's effect on financial integration? Currency risk, legal harmonization, or trade?," Working Paper Series 1216, European Central Bank.
  3. Martin, Philippe & Rey, Helene, 2004. "Financial super-markets: size matters for asset trade," Journal of International Economics, Elsevier, vol. 64(2), pages 335-361, December.
  4. Nicola Cetorelli & Linda S. Goldberg, 2010. "Global banks and international shock transmission: evidence from the crisis," Staff Reports 446, Federal Reserve Bank of New York.
  5. J. Barkley Rosser, 2009. "Introduction," Chapters, in: Handbook of Research on Complexity, chapter 1 Edward Elgar Publishing.
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  7. Peter Egger, . "A Note on the Proper Econometric Specification of the Gravity Equation," WIFO Working Papers 108, WIFO.
  8. Portes, Richard & Rey, Helene, 2005. "The determinants of cross-border equity flows," Journal of International Economics, Elsevier, vol. 65(2), pages 269-296, March.
  9. 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.
  10. 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.
  11. Murphy, Kevin M & Topel, Robert H, 2002. "Estimation and Inference in Two-Step Econometric Models," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(1), pages 88-97, January.
  12. Claudia M. Buch & John C. Driscoll & Charlotte Ostergaard, 2010. "Cross-Border Diversification in Bank Asset Portfolios," International Finance, Wiley Blackwell, vol. 13(1), pages 79-108, 03.
  13. Bruce A. Blonigen & Ronald B. Davies & Glen R. Waddell & Helen T. Naughton, 2004. "FDI in Space: Spatial Autoregressive Relationships in Foreign Direct Investment," NBER Working Papers 10939, National Bureau of Economic Research, Inc.
  14. Badi H. Baltagi & Peter Egger & Michael Pfaffermayr, 2005. "Estimating Models of Complex FDI: Are There Third-Country Effects?," Center for Policy Research Working Papers 73, Center for Policy Research, Maxwell School, Syracuse University.
  15. Aviat, Antonin & Coeurdacier, Nicolas, 2006. "The Geography of Trade in Goods and Asset Holdings," ESSEC Working Papers DR 06012, ESSEC Research Center, ESSEC Business School.
  16. James E. Anderson & Eric van Wincoop, 2003. "Gravity with Gravitas: A Solution to the Border Puzzle," American Economic Review, American Economic Association, vol. 93(1), pages 170-192, March.
  17. 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.
  18. 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.
  19. Richard Baldwin & Daria Taglioni, 2006. "Gravity for Dummies and Dummies for Gravity Equations," NBER Working Papers 12516, National Bureau of Economic Research, Inc.
  20. repec:spo:wpecon:info:hdl:2441/c8dmi8nm4pdjkuc9g708pipbp is not listed on IDEAS
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