This paper surveys the most important developments in multivariate ARCH-type modelling. It reviews the model specifications and inference methods, and identifies likely directions of future research.

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We review the international finance literature to assess the extent to which international factors affect financial asset demands and prices. International asset pricing models with mean-variance investors predict that an asset’s risk premium depends on its covariance with the world market portfolio and, possibly, with exchange rate changes. The existing empirical evidence shows that a country’s risk premium depends on its covariance with the world market portfolio and that there is some evidence that exchange rate risk affects expected returns. However, the theoretical asset pricing literature relying on mean-variance optimizing investors fails in explaining the portfolio holdings of investors, equity flows, and the time-varying properties of correlations across countries. The home bias has the effect of increasing local influences on asset prices, while equity flows and cross-country correlations increase

In this paper we model the expected returns and risk of international bond markets. We make no assumptions about the extent of bond market integration and thus allow national bond market to be partially integrated into world bond markets. Using a conditional asset pricing model which allows for variation in the prices and quantities of risk, we find strong evidence that bond markets are only partially integrated into world bond markets. Around one quarter of total expected returns is due to time-varying expected return that is related to local market risk. The remaining expected return is due to time-varying world bond market risk. A number of robustness checks confirm our main results. Given the importance of measuring expected returns, we illustrate the difference in expected returns that can be generated from models that make differing assumptions about the extent of integration. These difference can be quite substantial.

Abstract: In this paper we make use of the uncovered interest rate parity (UIRP) relationship to examine the extent that the liberalization of emerging financial markets has resulted in the integration of developing countries’ currency markets into the international capital market. Previous tests of the impact of liberalization on the integration of emerging markets capital markets into world financial markets are confined to equity markets, ignoring currency markets that arguably are more important in determining the success of financial liberalization. We find that, in general, deviation from UIRP in the emerging markets is systematic in nature and that a significant part of emerging market currency excess returns is attributable to time-varying risk premium. Importantly we also find that these countries ’ currency deposits provide U.S. (equity) investors the benefits of international diversification. Our results also show that for some markets, liberalization improved (worsened) investors’ perception of growth opportunity while reducing (increasing) investors ’ perception of the probability of financial distress. Finally, while several countries benefited from liberalization and have become more integrated into the world capital market, the experience is country specific. JEL classification: F21, F31, F36 Key words: capital market integration, uncovered interest rate parity (UIRP), financial liberalization, GARCH model The authors gratefully acknowledge the Federal Reserve Bank of Atlanta for research support in the later stages of this project. They also thank Gayle Delong, Jerry Dwyer, Jim Lothian, and Michael Melvin for helpful comments and the

comments. We also thank Karen Simhony-Boniel for assistance during the data collection process. Special thanks are due to Mark N. Cutis, Jaakko P. Karki, Fukuyoshi Kikunaga, Amos Rubin, and Constantine Thanassulas for their detailed description of the workings of the primary market for international bonds. A. Melnik thanks the visiting fellow program at ICER in Torino for its hospitality while part of this work was conducted.

Why do rich countries receive the lion’s share of international investment flows? Although this wealth bias is strong today, it was even stronger during the first global capital market boom before 1913. Very little of British capital exports went to poor countries, whether colonies or not. This paper constructs panel data for 34 countries that as a group received 92 % of British capital. It concludes that international capital market failure had only second-order effects on the geographical distribution of British capital. The three local fundamentals that mattered most were schooling, natural resources and demography. Rich countries receive the lion’s share of cross-border investment. A large literature has proposed theoretical explanations for this wealth bias (Gertler and Rogoff, 1990; Lucas, 1990; Barro, 1991; King and Rebelo, 1993) and others since, but exploration of the wealth bias during the first great global capital boom, after 1870, has only just begun (Lane and Milesi-Ferretti, 2001; Obstfeld and Taylor, 2003). It appears, in fact, that no study has yet investigated the determinants of the geographic distribution of international investment before World War I. Table 1 summarises the destination of European foreign investment just prior to

We study the long-run and short-run dynamics between stock prices and exchange rates and the channels through which exogenous shocks impact on these markets through the use of cointegration methodology and multivariate Granger causality tests. We apply the analysis to a group of Pacific Basin countries over the period 1980 to 1998. The evidence suggests that stock and foreign exchange markets are positively related and that the US stock market acts as a conduit for these links. Furthermore, these links are not found to be determined by foreign exchange restrictions. Finally, through the application of recursive estimation the evidence shows that the financial crisis had a temporary effect on the long-run comovement of these markets.

Economic Efficiency, funded by the European Commission under the Human Potential — Research Training Network

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