A Decomposition of Global Linkages in Financial Markets Over Time
This paper tests if real and financial linkages between countries can explain why movements in the world's largest markets often have such large effects on other financial markets, and how these cross-market linkages have changed o...
| Main Authors: | , |
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| Format: | Working Paper |
| Language: | en_US |
| Published: |
2003
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| Subjects: | |
| Online Access: | http://hdl.handle.net/1721.1/1837 |
| _version_ | 1811081377734459392 |
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| author | Forbes, Kristen Chinn, Menzie David |
| author_facet | Forbes, Kristen Chinn, Menzie David |
| author_sort | Forbes, Kristen |
| collection | MIT |
| description | This paper tests if real and financial linkages between countries can explain why
movements in the world's largest markets often have such large effects on other
financial markets, and how these cross-market linkages have changed over time. It
estimates a factor model in which a country's market returns are determined by: global,
sectoral, and cross-country factors (returns in large financial markets), and
country-specific effects. Then it uses a new data set on bilateral linkages between the
world's 5 largest economies and about 40 other markets to decompose the
cross-country factor loadings into: direct trade flows, competition in third markets,
bank lending, and foreign direct investment. Estimates suggest that both cross-country
and sectoral factors are important determinants of stock and bond returns, and that the
U.S. factor has recently gained importance, while the Japanese and U.K. factors have
lost importance. From 1996-2000, real and financial linkages became more important
determinants of how shocks are transmitted from large economies to other markets. In
particular, bilateral trade flows are large and significant determinants of cross-country
linkages in both stock and bond markets. Bilateral foreign investment is usually
insignificant. Therefore, despite the recent growth in global financial flows, direct trade
still appears to be the most important determinant of how movements in the world's
largest markets affect financial markets around the globe. |
| first_indexed | 2024-09-23T11:45:43Z |
| format | Working Paper |
| id | mit-1721.1/1837 |
| institution | Massachusetts Institute of Technology |
| language | en_US |
| last_indexed | 2024-09-23T11:45:43Z |
| publishDate | 2003 |
| record_format | dspace |
| spelling | mit-1721.1/18372019-04-12T08:22:44Z A Decomposition of Global Linkages in Financial Markets Over Time Forbes, Kristen Chinn, Menzie David Trade Linkages Bank Lending Factor Models Financial Integration Interdependence This paper tests if real and financial linkages between countries can explain why movements in the world's largest markets often have such large effects on other financial markets, and how these cross-market linkages have changed over time. It estimates a factor model in which a country's market returns are determined by: global, sectoral, and cross-country factors (returns in large financial markets), and country-specific effects. Then it uses a new data set on bilateral linkages between the world's 5 largest economies and about 40 other markets to decompose the cross-country factor loadings into: direct trade flows, competition in third markets, bank lending, and foreign direct investment. Estimates suggest that both cross-country and sectoral factors are important determinants of stock and bond returns, and that the U.S. factor has recently gained importance, while the Japanese and U.K. factors have lost importance. From 1996-2000, real and financial linkages became more important determinants of how shocks are transmitted from large economies to other markets. In particular, bilateral trade flows are large and significant determinants of cross-country linkages in both stock and bond markets. Bilateral foreign investment is usually insignificant. Therefore, despite the recent growth in global financial flows, direct trade still appears to be the most important determinant of how movements in the world's largest markets affect financial markets around the globe. 2003-03-14T19:09:48Z 2003-03-14T19:09:48Z 2003-03-14T19:09:48Z Working Paper http://hdl.handle.net/1721.1/1837 en_US MIT Sloan School of Management Working Paper;4414-03 455664 bytes application/pdf application/pdf |
| spellingShingle | Trade Linkages Bank Lending Factor Models Financial Integration Interdependence Forbes, Kristen Chinn, Menzie David A Decomposition of Global Linkages in Financial Markets Over Time |
| title | A Decomposition of Global Linkages in Financial Markets Over Time |
| title_full | A Decomposition of Global Linkages in Financial Markets Over Time |
| title_fullStr | A Decomposition of Global Linkages in Financial Markets Over Time |
| title_full_unstemmed | A Decomposition of Global Linkages in Financial Markets Over Time |
| title_short | A Decomposition of Global Linkages in Financial Markets Over Time |
| title_sort | decomposition of global linkages in financial markets over time |
| topic | Trade Linkages Bank Lending Factor Models Financial Integration Interdependence |
| url | http://hdl.handle.net/1721.1/1837 |
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