Financial Integration and International Risk Sharing

Conventional wisdom suggests that financial liberalization can help countries insure against idiosyncratic risk. There is little evidence, however, that countries have increased risk sharing despite recent widespread financial liberalization. This work shows that the key to understanding this puzzling observation is that conventional wisdom assumes frictionless international financial markets, while actual international financial markets are far from frictionless. In particular, financial contracts are incomplete and enforceability of debt repayment is limited. Default risk of debt contracts constrains borrowing, and more importantly, it makes borrowing more difficult in bad times, precisely when countries need insurance the most. Thus, default risk of debt contracts hinders international risk sharing. When countries remove their official capital controls, default risk is still present as an implicit barrier to capital flows; the observed increase in capital flows under financial liberalization is in fact too limited to improve risk sharing. If default risk of debt contracts were eliminated, capital flows would be six times greater, and international risk sharing would increase substantially.international risk sharing, financial integration, financial liberalization, financial frictions, sovereign default, international capital flows

Financial Integration and International Risk Sharing

In the last two decades, financial integration has increased dramatically across the world. At the same time, the fraction of countries in default has more than doubled. Contrary to theory, however, there appears to have been no substantial improvement in the degree of international risk sharing. To account for this puzzle, we construct a general equilibrium model that features a continuum of countries and default choices on state-uncontingent bonds. We model increased financial integration as a decrease in the cost of borrowing. Our main finding is that as the cost of borrowing is lowered, financial integration and sovereign default increases substantially, but the degree of risk sharing as measured by cross section and panel regressions increases hardly at all. The explanation, we propose, is that international risk sharing is not sensitive to the increase in financial integration given the current magnitude of capital flows because countries can insure themselves through accumulation of domestic assets. To get better risk sharing, capital flows among countries need to be extremely large. In addition, although the ability to default on loans provides state contingency, it restricts international risk sharing in two ways: higher borrowing rates and future exclusion from international credit marketsFinanical Integration, Risk Sharing, Globalization, Sovereign Debt

Duration of Sovereign Debt Renegotiation

The structure of sovereign debt has evolved over time from illiquid bank loans toward liquid bonds that are traded on the secondary market in the past two decades. This change in the debt structure is accompanied with a reduction in the duration of sovereign debt renegotiation; it takes on average 9 years to restructure bank loans, but only 1 year to restructure bonds. In this work, we argue that the secondary market plays an important role -- information revelation -- in reducing the renegotiation length. We construct a dynamic bargaining game between the government and the creditors with private information on the creditors' reservation value. The government uses costly delays as a screening device for the creditors' type, and so the delays arise in equilibrium. Moreover, the more severe is the private information, the longer the delays are. When we introduce the secondary market, the equilibrium delays are greatly reduced. This is because the secondary market price conveys information about the creditors' reservation and lessens the information friction. We also find that bond financing is more friendly to the debtor country; it increases ex-ante borrowing and investment and ex-post renegotiation welfare of the government.sovereign debt renegotiation, secondary bond markets, dynamic bargaining, incomplete information

Spin-Cherenkov effect in a magnetic nanostrip with interfacial Dzyaloshinskii-Moriya interaction

Spin-Cherenkov effect enables strong excitations of spin waves (SWs) with nonlinear wave dispersions. The Dzyaloshinskii-Moriya interaction (DMI) results in anisotropy and nonreciprocity of SWs propagation. In this work, we study the effect of the interfacial DMI on SW Cherenkov excitations in permalloy thin-film strips within the framework of micromagnetism. By performing micromagnetic simulations, it is shown that coherent SWs are excited when the velocity of a moving magnetic source exceeds the propagation velocity of the SWs. Moreover, the threshold velocity of the moving magnetic source with finite DMI can be reduced compared to the case of zero DMI. It thereby provides a promising route towards efficient SW generation and propagation, with potential applications in spintronic and magnonic devices.Comment: 6 pages, 5 figures. To be published in Scientific Report

Firm dynamics and financial development

This paper studies the impact of cross-country variation in financial market development on firms’ financing choices and growth rates using comprehensive firm-level datasets. We document that in less financially developed economies, small firms grow faster and have lower debt to asset ratios than large firms. We then develop a quantitative model where financial frictions drive firm growth and debt financing through the availability of credit and default risk. We parameterize the model to the firms’ financial structure in the data and show that financial restrictions can account for the majority of the difference in growth rates between firms of different sizes across countries. ; Original title: Contract enforcement and firms' financingContracts ; Debt management

The Laplacian Eigenvalues and Invariants of Graphs

In this paper, we investigate some relations between the invariants (including vertex and edge connectivity and forwarding indices) of a graph and its Laplacian eigenvalues. In addition, we present a sufficient condition for the existence of Hamiltonicity in a graph involving its Laplacian eigenvalues.Comment: 10 pages,Filomat, 201