The Impact of Real and Financial Integration on Asset Price Co-Movement with Application to Luxembourg - BEIBERTCOS
Coordinating Institution:
Université du Luxembourg
Other Partner(s):
University of Maastricht (NL) ,
University Paris X - Nanterre (Dept. of Psychological and Education Sciences)
From: 01/06/2007
To: 31/05/2010
Budget: 400,000.00€
Contact(s):
Beine Michel
Summary
During 2009 the paper “The Dark Side of Global Integration: Increasing Tail Dependence” has after a revision been accepted for publication in the Journal of Banking & Finance, 2010, Volume 34, Issue 1, pages 184-192. In this study we measure stock market coexceedances using the methodology of Cappiello, Gerard and Manganelli (2005). First, we construct annual coexceedance probabilities for both lower and upper tail return quantiles using daily data from 1974–2006. Next, we explain these probabilities in a panel gravity model framework.
The main results indicate that financial liberalization significantly increases left tail comovement, whereas trade integration significantly increases comovement across all quantiles. The introduction of the euro increases comovement across the entire return distribution, thereby significantly reducing the benefits of portfolio diversification. The main work during 2009 was on the paper “Remittances and Financial Openness”, which is distributed as a CREA Discussion Paper and presented at several international conferences.
Early 2010 we plan to submit it to a refereed journal. Migrant remittances have become an important and reliable source of funds for many developing countries. Therefore, there is a strong incentive for receiving countries to attract more remittances. One possible option is to open the financial borders in order to decrease the cost of remitting trough increased competition. However, governments need to weight the positive effects of remittances with the risk of macroeconomic volatility associated with financial openness. In this paper we investigate the link between remittance receipts and financial openness. We develop a small model and statistically test for the existence of such a relationship using a sample of 66 mostly developing countries from 1980-2005.
Empirically we use a dynamic generalized ordered logit model to deal with the categorical nature of the financial openness policy, accounting for the persistence of financial openness, initial conditions and relevant control variables. In addition, we apply a two-step method akin to two stage least squares to deal with the endogeneity of remittances. We find that the more remittances a country receives the more likely it will be financially open. This positive effect is both statistically significant and economically large. These results are supported by counterfactual experiments. In 2010 we take the final step in our project and focus on the effects of real and financial integration on the Luxembourgish economy.
In particular, we will investigate how the Luxembourgish stock market behaves in relation to other stock markets since 1977. A unique database with daily data on the Lux index collected during 2009 facilitates this endeavor.
Refereed Scientific Publications
- Beine, M., Cosma, A. and Vermeulen, R. (2010). The dark side of global integration: Increasing tail dependence. Journal of Banking & Finance, 34, 184-192
Other Publications
- Beine, M., Lodigiani, E. and Vermeulen, R. (2009). Remittances and Financial Openness. CREA Discussion Paper 2009-09.