Econometrics of the Effects of Stock Market Development on Growth and Private Investment in Lower Income Countries

Recent literature suggests that stock market liberalisation has positive effects on macroeconomic growth and private investment. However, econometric relations are largely dependent on the inclusion of higher income countries in such samples, which quite conceivably limits the relevance for lower income nations. Indeed, some evidence in this study indicates that stock market development has a more positive impact on growth for greater levels of per capita GDP. Similarly, lagged equity price appreciation seems to boost private investment growth, but only in rich countries. Curiously, neither financial nor legal development variables, which are more serviceably relevant than initial income, seem to be mitigating factors, but these data imply subdued enthusiasm regarding emerging equity market development.

Econometrics of the Real Effects of Cross-Border Capital Flows in Emerging Markets

This study examines the effects of cross-border flows - FDI, FPI, and FBL - on growth and savings rates using data on 56 countries from 1969 through 1998. Very generally, few flow measures are significant determinants of real variables. However, consideration of the initial level of financial depth - including measures of private credit, bank lending, and stock market development - seems to produce more significant results, as some data indicate that flows have a more deleterious (benevolent) effect in countries with lower (higher) levels of development. Moreover, extreme bound analysis (EBA) of significant results indicates that these findings are robust.

Time-Series Econometrics of the Real and Financial Effects of Capital Flows: Selected Cases in Africa and Southern Asia

Few studies address the real effects of international capital flows. Instead of a cross-sectional design, this study exclusively examines time-series data from nine countries. Four cases - Nigeria, Zimbabwe, India, and Pakistan - produce evidence that either FDI or FPI adversely affect growth or savings rates, while two cases produce some evidence of a benevolent effect - Uganda and Sri Lanka. The data for Kenya, Zambia, and Bangladesh largely produce ambiguous results, and in fact, the vast majority of models across all cases indicate no significant relation. The preponderance of negative effects is largely consistent with the notion that lower income countries lack sufficient 'absorptive capacity' to harness foreign investment.

Arbitrage-free models of stocks and bonds

A small but ambitious literature uses affine arbitrage-free models to estimate jointly U.S. Treasury term premiums and the term structure of equity risk premiums. Within this approach, this paper identifies the parameter restrictions that are consistent with a simple dividend discount model, extends the cross-section to Germany and France, averages across multiple observable-factor and market prices of risk specifications, and considers alternative samples for parameter estimation. The results produce intuitive trajectories for both sets of premiums given standard samples starting from July 1993. However, the decomposition of nominal U.S. Treasury yields, but not long-run equity risk premiums, is sensitive to data beyond 2008, which raises some questions about the net effects of unconventional monetary policy measures. Nonetheless, the rotation from sharp inversion during the financial crisis to an upward-sloping term structure of equity risk premiums more recently, with modest readings at the front end, is not inconsistent with some net moderation in required compensation for equity risk in the United States

Emerging Stock Market Liberalisation, Total Returns, and Real Effects: Some Sensitivity Analyses

Recent studies report that equity market liberalisation positively correlates with total return, which in turn purportedly increases private investment growth. While the finding on reform and performance is generally robust to alternative perspectives on capital account liberalisation that emphasise over-heating and volatility, this crucial first link in the causal chain is not wholly robust empirically. For example, previous findings are very sensitive to alternative definitions of precise liberalisation event dates. Also, spatial variance seems to drive significant results in panel regressions, which is problematic for interpreting the particular path from equity prices to private investment. Finally, existing studies do not satisfactorily control for other determinants of returns, and extreme bound analysis (EBA) suggests that liberalisation is spurious.

A Survey of the Econometric Literature on the Real Effects of International Capital Flows in Lower Income Countries

This review examines the empirical literature on financial flows and economic performance, with particular respect to foreign direct investment (FDI), foreign portfolio investment (FPI), and foreign bank lending (FBL). Few studies report unequivocal positive statistical relations between flows and performance. Instead, even generally benevolent perspectives on liberalisation suggest that lower income countries should exhibit sufficient 'absorptive capacity' vis-à-vis variables such as the initial level of income, education, or trade openness. Notably, lower income countries are less likely to meet such 'thresholds'. But, before drawing definitive conclusions, shortcomings beset inference from existing studies. For example, the literature ignores the initial level of financial development in host countries, a potentially important intervening variable. Also, previous results likely suffer from specification bias, as few studies produce a standard set of control variables.

Federal Reserve Bank of New York Staff Reports

Abstract Common affine term structure models (ATSMs) suggest that bond yields include both expected short rates and term premiums, in violation of the strictest forms of the expectations hypothesis (EH). Similarly, forward foreign exchange contracts likely include not only expected depreciation but also a sizeable premium, which similarly contradicts pure interest rate parity (IRP) and complicates inferences about anticipated returns on foreign currency exposure. Closely following the underlying logic of ubiquitous term structure models in parallel, and rather than the usual econometric approach, this study derives arbitrage-free affine forward currency models (AFCMs) with closed-form expressions for both unobservable variables. Model calibration to eleven forward U.S. dollar currency pair term structures, and notably without any information from corresponding term structures, from the mid-to-late 1990s through early 2015 fits the data closely and suggests that the premium is indeed nonzero and variable, but not to the degree implied by previous econometric studies