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

Listed author(s):
  • Katja Neugebauer

    ()

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, and I estimate cross-section regressions for each year. I find strong evidence for a spatial dimension in cross-border banking. Furthermore, the direct effect of distance decreases significantly when applying spatial econometric techniques.

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File URL: http://www-sre.wu.ac.at/ersa/ersaconfs/ersa11/e110830aFinal01227.pdf
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Paper provided by European Regional Science Association in its series ERSA conference papers with number ersa11p1227.

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Date of creation: Sep 2011
Handle: RePEc:wiw:wiwrsa:ersa11p1227
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References listed on IDEAS
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  1. 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.
  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?," Journal of International Economics, Elsevier, vol. 81(1), pages 75-88, May.
  3. Richard Portes & Helene Rey, 1999. "The Determinants of Cross-Border Equity Flows," NBER Working Papers 7336, National Bureau of Economic Research, Inc.
  4. Buch, Claudia M. & Driscoll, John C. & Ostergaard, Charlotte, 2005. "Cross-border diversification in bank asset portfolios," Working Paper Series 0429, European Central Bank.
  5. Dennis Novy, 2011. "Gravity Redux: Measuring International Trade Costs with Panel Data," CESifo Working Paper Series 3616, CESifo Group Munich.
  6. 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.
  7. Philippe Martin & Helene Rey, 2001. "Financial Super-Markets: Size Matters for Asset Trade," NBER Working Papers 8476, National Bureau of Economic Research, Inc.
  8. 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.
  9. 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.
  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. Nicola Cetorelli & Linda S. Goldberg, 2010. "Global Banks and International Shock Transmission: Evidence from the Crisis," NBER Working Papers 15974, National Bureau of Economic Research, Inc.
  12. 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.
  13. Richard Baldwin & Daria Taglioni, 2006. "Gravity for Dummies and Dummies for Gravity Equations," NBER Working Papers 12516, National Bureau of Economic Research, Inc.
  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. 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.
  16. Egger, Peter, 2000. "A note on the proper econometric specification of the gravity equation," Economics Letters, Elsevier, vol. 66(1), pages 25-31, January.
  17. 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.
  18. repec:spo:wpecon:info:hdl:2441/c8dmi8nm4pdjkuc9g708pipbp is not listed on IDEAS
  19. 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.
  20. J. Barkley Rosser, 2009. "Introduction," Chapters, in: Handbook of Research on Complexity, chapter 1 Edward Elgar Publishing.
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