A Survey of Financial Integration in East Asia; How Far? How Much Further to Go?

This paper offers a selective survey of the recent empirical literature on financial integration, the focus being on alternative definitions of financial integration and measurement issues and results. The literatures to be reviewed have been selected primarily because their analyses have included some East Asian economies. In particular, this study concentrates on the ASEAN?5 plus 3 or APT economic group (i.e. Indonesia, Thailand, Malaysia, Philippines, Singapore, Korea, China and Japan) as well as Hong Kong and Chinese Taipei. These are the economies that have consciously attempted to intensify intraregional monetary and financial cooperation in the last few years, particularly since the East Asian crisis of 1997-98.Capital controls, East Asia, equity, financial integration, parity conditions.

Investigating Market Linkages and Investor Behavior in Times of Turmoil and Uncertainty

Throughout the last decades, investigations on market linkages and investor behavior in times of turmoil and uncertainty have received the attention of researchers and financial practitioners alike. This dissertation offers five distinct research papers which contribute to the existing literature on this overarching topic. First, we provide a thorough analysis of the time-varying linkages between regional and global equity markets. Second, and in line with the notion of increasing equity market integration over time, we investigate different types of flights to quality in times of stock market turmoil. Third, we provide novel empirical evidence on the usefulness of new sources of information on investor behavior towards the measurement of financial market linkages. Fourth, building on the increasing relevance of these new sources of information, we demonstrate that different measures for online investor attention do not necessarily constitute equivalent proxies for the latent variable. Last, we contribute to the strands of financial literature dealing with the estimation of dynamic linkages between financial markets and variables in the form of time-varying correlations. More specifically, we propose a score-driven extension to the well-known dynamic conditional correlation model which provides a means to quantify the time-varying influence of news on correlation dynamics. Taking the severe impact of recent and current crisis events on financial markets into consideration, the research papers comprised in this dissertation are of uttermost importance for financial market participants

Executive compensation

The optimal design of executive compensation is one of the primary issues in the area of corporate governance and has been investigated in considerable detail in the academic literature over the past three decades. The underlying assumption behind the design of optimal compensation schemes is that the executives of the firm have more information on the firm’s projects and cash flows than the shareholders. In the presence of symmetric information, since the shareholders can completely distinguish the executive’s effort from bad luck or other extraneous factors, there is little need to motivate the executive beyond a flat salary. In the presence of asymmetric information, the shareholder faces two problems: One, to select the right type of agent (the adverse selection problem) and two, to motivate the agent to work hard once selected (the moral hazard problem). All executive compensation schemes represent trade-offs between these two agency problems. In this survey, in the first section, I start by discussing the theory of executive compensation. Why do firms pay executives? I distinguish two major approaches. The first arises from the theory of optimal compensation contracting and focuses on the composition of pay. It argues that the composition of pay is set to attract good executives (to solve the adverse selection problem) and motivate them to work hard (the moral hazard problem). The second approach focuses on the level of pay. It argues that managers have a considerable degree of power in setting their own wages, and in particular, use their power to extract excessive pay or rents from the shareholders. In the second section, I discuss the evidence on both the composition and level of pay and how it has changed over time, treating each component pay separately. I also discuss the composition of pay in countries around the world and in specific industries. In the third section, I describe who decides pay composition and levels. Finally, in the fourth section, I conclude by examining how the structure of pay has real consequences for firms

Slow Growth, Destructive Competition, and Low Road Labor Relations: A Keynes-Marx-Schumpeter Analysis of Neoliberal Globalization

This essay begins with a brief overview of the standard arguments for and against global Neoliberalism and an overview of economic performance in the Neoliberal era. Section II argues that the micro theory appropriate to an analysis of the likely effects of global liberalization is not the neoclassical theory of perfectly competitive markets relied on by Neoliberal supporters, but Joseph Schumpeter’s theory of “natural oligopolies.” Section III presents a theory of the structural contradictions of global Neoliberalism that integrates a Keynesian-Marxian macro perspective with Schumpeterian and Marxian micro theory. The last section considers the political and policy 1implications of the analysis

On Secular Stagnation in the Industrialized World

We argue that the economy of the industrialized world taken as a whole is currently – and for the foreseeable future will remain – highly prone to secular stagnation. But for extraordinary fiscal policies, real interest rates would have fallen much more and be far below their current slightly negative level, current and prospective inflation would be further short of the two percent target levels and past and future economic recoveries would be even more sluggish. We start by arguing that, contrary to current practice, neutral real interest rates are best estimated for the bloc of all industrial economies given capital mobility between them and relatively limited fluctuations in their aggregated current account. We show, using standard econometric procedures and looking at direct market indicators of prospective real rates, that neutral real interest rates have declined by at least 300 basis points over the last generation. We argue that these secular movements are in larger part a reflection of changes in saving and investment propensities rather than the safety and liquidity properties of Treasury instruments. We highlight the observation that levels of government debt, the extent of pay-as-you-go old age pensions and the insurance value of government healthcare programs have all ceteris paribus operated to raise neutral real rates. Using estimates drawn from the literature, as well as two general equilibrium models emphasizing respectively life-cycle heterogeneity and individual uncertainty, we suggest that the “private sector neutral real rate” may have declined by as much as 700 basis points since the 1970s

The Quest for Stability: the macro view

On September 3-4, 2009 SUERF and Utrecht University School of Economicsorganized the Colloquium "The Quest for Stability" in Utrecht, the Netherlands. The papers included in this SUERF Study are based on contributions to the Colloquium.asset prices, bubbles, financial institutions, global recession, interest rates, liquidity, monetary policy, regulation, stability, supervision.

Validation of trading strategies in the foreign exchange

The aftermath of the recent financial crisis has caused the narrowing of investment opportunities for foreign exchange (FX) traders and investors. A debate about the profitability of trading strategies in FX has started among practitioners and academic researchers who have wondered whether is still possible to obtain positive excess returns (alpha). In this research I validate a set of trading strategies for FX. Seven experiments are carried out on macroeconomic market factors like trendfollowing, carry and value, separately. The outcome holds that the dissolution of synchronous monetary policies increases the probability of observing trends and carry opportunities in the FX. The failure of the uncovered interest rate parity by the so-called forward rate puzzle and that of the purchase parity power open opportunities for strategies like momentum, carry and value. Carry is not only applicable to spot rates as can also be used to trade FX options. Two experiments are performed to study the consistency of FX option premia and the performance of carry trade for options. For short-dated options, like the weekly ones, carry cannot produce material profits as the error implied by the forward rate is not large enough. Conversely, the premium earned from trading FX call options is a consistent source. A second line of research is dedicated to the analysis of trading strategies for FX highfrequency data. This study consists of implementing machine learning algorithms, like the exponentially-smoothing recurrent neural networks (RNN), to forecast future prices and derive a trading strategy from it. The training of these models appear to be computationally intensive but simpler than that of other neural networks like the long-short-term memory ones (LSTM). The accuracy of the forecast is adequate with no signs of over-fitting. The performance appears to be highly influenced by the presence of intra-day seasonality and jumps. A range of solutions are explored to address such a limitation

Household Portfolios in Germany

This paper describes portfolio choices of German households in the 1980's and 1990's. We present stylized facts and analyze recent trends of asset ownership rates and asset shares on the basis of national accounts and survey data. We correlate socio-demographic household characteristics with asset shares and ownership, and analyze how German households have adjusted their asset portfolios in response to the policy changes during this time. A particular focus is on the effects of German reunification and the portfolio adjustments of East German households during the transition process.