J. K. Dietrich – Asia-Link Program -- Research Conference on Safety and Efficiency of Financial System -- August 2007

Financial Integration, Portfolio Selection, and Investment

J. Kimball Dietrich

University of Southern California

Session 2 – August 27, 2007

J. K. Dietrich – Asia-Link Program -- Research Conference on Safety and Efficiency of Financial System -- August 2007

Session 2 -- Overview and Themes

Borja-Goyeau (BG), “International Liquidity, Monetary Spillovers, and Asset Prices”

Dupont-Goyeau-Sarte (DGS), “World Business Cycle, Local Specialization and Asset Prices”

Bautista-Maveyraud-Tricoire (BM), “Saving Investment, Financial Crisis, and Structural Changes in East Asian Economies”

Bautista-Goyeau-Yu (BGY), “Regime Switching Market Risk: Evidence from the Philippines”

J. K. Dietrich – Asia-Link Program -- Research Conference on Safety and Efficiency of Financial System -- August 2007

Overview All four papers are empirical They are all sophisticated analyses and

provide a thorough economic literature context

The first three analyze regions or countries in relation to other regions or countries, looking for global effects on Asian economies

J. K. Dietrich – Asia-Link Program -- Research Conference on Safety and Efficiency of Financial System -- August 2007

Overview: Comparison

AuthorsDependent Variable

Explanatory Variables Estimates Observations Period Data

BG

Regional Stock

ReturnsRegional money

growth, GDP, CPI OLS, lagsRegions: Southeast Asian 5,

Europe, U.S. 1995-2004 Q

DGS

Production, Global Prices Lagged Values

Markov switching,

Concordance Indonesia, Korea, Malaysia,

Philippines, Singapore, Thailand 1996-2007 M

BMInvestment

Ratio Savings RatioMarkov

switching

Hong Kong, Indonesia, Korea, Malaysia, Philippines, Singapore,

Thailand 1965-2004 A

BGYStock

returns Market ReturnMarkov

switching 17 Philippine Companies 1993-2006 M

J. K. Dietrich – Asia-Link Program -- Research Conference on Safety and Efficiency of Financial System -- August 2007

Themes All four papers repeat prior analysis to the

Asian contect Original work substantial

– BG => Baks-Kramer (1999) IMF WP– DPG => Harding-Pagan (2002, 2006)– BM=> Feldstein-Harioka (1980) + Hamilton

(1989)– BGY=> CAPM + Hamilton (1989)

J. K. Dietrich – Asia-Link Program -- Research Conference on Safety and Efficiency of Financial System -- August 2007

Themes What do we learn?

– In the three macroeconomic analyses, there are econometrically detectable feedbacks from region to region, or relations between cycles in different countries, or departures from savings-investment in single economies

Risk assessments change Connection to portfolio choice and relation

of capital flows to cycles, etc., are not clear

J. K. Dietrich – Asia-Link Program -- Research Conference on Safety and Efficiency of Financial System -- August 2007

Suggested Implications

Small countries are embedded in a larger world, for example no studies include China or Japan

Short data series on quarterly data or relatively small number of observations on annual data do not allow high resolution of results for emerging-market studies

A rich arena for significant measures of financial market integration is to be found in high-frequency data from financial markets

J. K. Dietrich – Asia-Link Program -- Research Conference on Safety and Efficiency of Financial System -- August 2007

Context for Analysis Recent “sub-prime” mortgage crisis

illustrates the fundamental truth that markets are integrated

Crises are the usual focus of policy-relevant research and analysis

Both current crisis and those of the 1990’s illustrate the importance of sectoral imbalances (i.e. the balance-sheet approach)