Essays on international financial integration

• Main Author: Tan, Sook Rei
• Other Authors: Chia Wai Mun
• Format: Theses and Dissertations
• Language: English
• Published: 2019
• Subjects: DRNTU::Social sciences::Economic theory
• Online Access: https://hdl.handle.net/10356/88508; http://hdl.handle.net/10220/47623
• Institution: Nanyang Technological University

International financial integration has become a global tendency through the past decades, allowing for capital mobility across country's borders to rise to an unprecedented scale. Theoretically, financial openness is believed to enhance economic growth through facilitating capital allocation between economies. Over the years, however, financial openness also seems to associate with the amplification of global financial cycle. Against such backdrop, there is constant debate between financial regulation and liberalization among economists and policy makers. This thesis contains three essays revolves around topic of international financial integration which aim to provide new insight to the ongoing debate from different perspectives. Chapter 1 proposes a multi-market model with heterogeneous agents investing in stock markets and foreign exchange market. Using monthly US and Japanese stock data and exchange rate of Yen/USD from May 1993 to September 2017, we estimate the vector autoregression model with threshold and Markov switching mechanisms. The regression results show that behavioral heterogeneity exists in multiple markets and cross-market sources link different markets together endogenously. The behavioral heterogeneity and interaction among markets are found state-dependent, and empirical evidences support they are more significant during low volatility periods. Chapter 2 analyzes the role of different types of capital flows on foreign exchange instability of 21 emerging market economies (EMEs) between 1995Q1 and 2015Q2. This study consists of two steps. First, we identify turbulence episodes of exchange market pressure (EMP) index for each sample country under framework of extreme value theory. Second, a comparative analysis between the extreme positive and negative EMP episodes is carried out by using panel multinomial logistic regression. Our findings show that (1) there is asymmetry in the EMP distributions, where the occurrence of extreme positive episodes is more frequent than the extreme negative episodes in most EMEs, (2) portfolio and credit flows are significant determinants to both extreme events, and (3) by distinguishing the residency of capital flows, foreign short-term capital inflow is the key factor that attributes to the currency crises in the EMEs. Chapter 3 examines the nonlinear relationship between international financial integration (IFI) and income inequality. Our sample covers 43 industrial and developing economies, spanning 1980-2014 period. Using dynamic panel threshold regression technique, we find an inverted U-shaped IFI-inequality nexus robust to four de facto IFI indicators and several sensitivity checks.