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Hot money in bank credit flows to emerging markets during the banking globalization era
Abstract
This paper investigates the relative importance of hot money in bank credit and portfolio flows from the US to 18 emerging markets over the period 1988-2012.•We deploy state-space models à la Kalman filter to identify the unobserved hot money as the temporary component of each type of flow.•The analysis reveals that the importance of hot money relative to the permanent component in bank credit flows has significantly increased during the 2000s relative to the 1990s.•This finding is robust to controlling for the influence of push and pull factors in the two unobserved components.•The evidence supports indirectly the view that global banks have played an important role in the transmission of the global financial crisis to emerging markets.•It endorses the use of regulations to manage international capital flows.
... In light of this, a thread of literature has documented the impact of hot money on major financial markets (Filer, 2004;Zhang et al., 2019). In particular, many studies have examined the influence of hot money on financial markets in emerging economies (e.g., Fuertes et al., 2016;Wei et al., 2018), wherein the surge in hot money is generally suggested as a destabilising factor and trigger of regulations. In this regard, examples of such circumstances are cited, including Brazil, Argentina, Taiwan, Thailand, Indonesia, etc. (Korinek, 2011;McCauley, 2010;Ostry et al., 2010). ...
... As a result, this might cause significant uncertainty and instability in the underlying market. Nevertheless, speculative funds have grown around the globe, especially in emerging markets, due to the notion of trade liberalisation and globalisation (Fuertes et al., 2016;Kim & Iwasawa, 2017). ...
Hot money is generally associated with economic and financial turmoil in emerging economies. In this backdrop, a number of studies document the causal links between hot money and financial markets. Accordingly, the study examines the causal relationship among hot money, equities, and real estate assets in the small-scale economy of Pakistan. For this purpose, we employ various time series techniques such as the JJ Co-integration test, Granger causality tests, Impulse Response Functions (IRF), and Variance Decomposition Analysis (VDC). The findings validate the long-term association between speculative funds and underlying investment markets. The results uncover unidirectional causality from investment markets to hot money in Pakistan. However, the lack of a bi-directional relationship among the underlying variables indicates that hot money is not a major driver of soaring prices in equities and real estate assets. Alternatively, developing the underlying markets attracts speculative cash inflows into the economy. The findings of the study highlight some useful implications for investors and regulators. For instance, the study's findings present valuable insights for international investors seeking diversification opportunities in small-scale economies such as Pakistan. Also, the regulators in the underlying economy can utilize the study findings to formulate an optimal model to manage international capital flows.
... e push factors relate to the external or global or home forces that push international capital flows to the host markets, such as the low interest rates, high international political and market uncertainty, low potential growth, and the portfolio diversification. e later literature studies, such as Taylor and Sarno [3], Agénor [4], Chuhan et al. [5], Forbes and Warnock [6], Fratzscher [7], and Fuertes et al. [8], have further discussed this problem. See the review of Koepke Koepke [9] for more details. ...
This paper investigates the cross-correlations between the foreign flows in A-share market and the uncertainties of market, economy, and policy in home markets, namely, the VIX index and the US EPU index. By employing the cross-correlation statistics and MF-DCCA method, we find the existence of the cross-correlations between the foreign flows and the VIX index, the foreign flows, and the US EPU index from qualitative and quantitative perspectives, respectively. For the cross-correlation between the foreign flows and VIX, small fluctuations are persistent, while large fluctuations are antipersistent. In contrast, the cross-correlation between the foreign flows and US EPU is antipersistent and steady. These results are robust by dividing the foreign flows into two parts in Shenzhen and Shanghai stock exchanges, respectively, and by shortening the periods to after the implementation of Shenzhen-Hong Kong Stock Connect.
1. Introduction
Since China opened its door to the world in 1978, the financial liberalization has been increased (https://business.cornell.edu/hub/2020/05/11/chinas-financial-liberalization/). And the Keynote Speech by Xi Jinping, the president of the People's Republic of China, at the Opening of the Boao Forum for Asia Annual Conference 2018 initiates the new round of the opening-up of Chinese financial market. After that, the limited amounts of QFII and RQFII have been relaxed, the Shanghai-London Stock Connect Program has been implemented, and the foreign equity caps in the banking, securities, and insurance industries have also been raised. As a result, we can see that the foreign investment has been increasing in recent years (see the news from the Global Time: https://www.globaltimes.cn/page/202108/1231158.shtml.), and the holding of foreign investors in A-share market continuously increases (see Figure 1). Therefore, it is important to be clear about the factors affecting the foreign flows in A-share market.
... The hot money issue is quite an interesting topic in the financial market currently (Kim & Iwasawa, 2017;Fuertes, Phylaktis, & Yan, 2016;Tsai, Chiang, Tsai, & Liou, 2014). Because of globalisation, hot money 1 can spread around the world, especially in emerging markets. ...
This study investigates the impact of hot money on stock and exchange rate markets and the returns and volatility spillover between the stock and exchange rate market in China by using the monthly data covering the period from July 2005 to June 2013. This paper also uses the quantile approach to determine whether the hot money influences the stock and exchange rate markets. The results first reveal the long-run equilibrium relationship that is exhibited between the stock and exchange rate market. Second, hot money has an impact on the stock market but has no effect on the exchange rate market, according to the VECM-BEKK model. Third, regarding the volatility spillover effects on the stock and exchange rate markets, there is a spillover effect on the Shanghai stock and exchange rate markets. Hot money has an impact on the stock and exchange rate markets. Finally, we apply the quantile regression to determine the impact of hot money on low quantiles of the exchange rate and high quantiles of the Shanghai and Shenzhen stock market. © Asian Academy of Management and Penerbit Universiti Sains Malaysia, 2017.
... Makes the laws, regulations, acts, which will be spelled out rules of interaction of pension funds, commercial banks, insurance companies as well as established rules of co-administration of the business. Venture capital institutions will be created for highly qualified specialists, and advising venture capital investors, thereby to secure their business (Fuertes et al., 2016). ...
Innovative policy of the state - it is the socio-economic policy. It reflects the investment activity in the state, which reflects the direction, goals, forms of state authority in the field of science and technology. The financial growth of the state is based on a combination of extensive and intensive factors. Under extensive factors mean weight gain used in the production of resources under intensive factors - an increase in resources and performance properties of their use. In modern times, the ability to finance growth through involvement in the turnover of new resources are extremely limited. As a consequence become crucial intense moments. A decisive impact on the macro-economic characteristics have innovation. They affect the social strength, on the environment, on the intensity of international technical cooperation, the degree of public safety and the competitiveness of the national economy in the world economy. Currently, the innovation process determines the chances of becoming a state. Innovative activity is characterized by complexity and high risk. To initiate innovation is insufficient availability of internal incentives and capabilities. Here, a decisive driving force can be external stimuli and in particular state aid.
This paper investigates the drivers explaining the heterogeneous responses of foreign portfolio investors across 43 emerging markets and developing economies (EMDEs) during low-flow episodes. Our investigations reveal several findings: (a) During low-flow episodes, EMDEs with stronger macroeconomic/institutional fundamentals—e.g., larger foreign reserves, less public indebtedness, and better institutional quality—suffer fewer reductions in foreign inflows. (b) EMDEs with more open/developed financial markets attract more portfolio inflows during surges but suffer larger declines during stops. Hence, we provide evidence supporting the foreign investor differentiation (according to fundamentals) and the mixed blessing of financial sectors hypothesis.
Makalede, kısa vadede daha iyi bir getiri arayan "sıcak para" veya spekülatif sermaye akışı ile Türkiye'nin borsa getirisi ve likiditesi arasındaki ilişkinin boyutu araştırılmıştır. Çalışmanın verileri NARDL ve Granger nedensellik testleri ile analiz edilmiştir. Elde edilen bulgularda, borsa getirisi ve likiditesi ile sıcak para bileşenleri arasında eşbütünleşik ve asimetirk bir ilişkinin olduğu görülmüştür. Granger nedensellik testinde ise, borsa likiditesi ile portföy yatırımları arasında iki yönlü nedenselliğin var olduğu görülmüştür.
Küreselleşme ile uluslararası finansal akımların güçlenmesi ardından, bu sürecin çeşitli sektörler üzerindeki etkileri uzun zamandır tartışılmakta ve araştırılmaktadır. Bir ülkeye yönelik fon akımlarının o ülkedeki fiyatlar genel düzeyi üzerinde güçlü etkilerinin olması beklenir. Hatta bu olası etkileri kontrol etmek için zaman zaman ekonomi politikalarına başvurulduğu izlenmektedir. Kısa vadeli fon akımlarının, öncelikli olarak finansal kesimi etkilemesi beklenir. Fakat bunun yanında pek çok sektörü dolaylı ya da doğrudan etkileyebilir. Çünkü finansal kesimde ortaya çıkan değişimler reel sektöre yansıma potansiyeli sahiptir. Bu çalışma kısa vadeli fon akımlarının konut fiyatları üzerindeki etkilerini Türkiye için araştırmaktadır. Söz konusu araştırma için Granger Nedensellik analizi yöntem olarak kullanılmıştır. Ayrıca araştırma, Türkiye’de konut fiyatlarının önemli ölçüde değişim gösterdiği 2010 ile 2022 yılları arası dönemi ele almaktadır. Analiz sonuçları, 2010 ve 2022 yılları arası dönem için kısa vadeli fon akımlarının, Türkiye’deki konut fiyatları üzerinde önemli etkilerinin olmadığı yönünde bulgular işaret etmektedir. Elde edilen bu bulgu konut sektörü için şaşırtıcı değildir.
This paper studies the financial market resilience against short-term capital flow shocks and then examine the impact of financial development on resilience. Based on the TVP-VAR model, we construct absorption intensity and duration to measure financial market resilience from size and time dimensions. We find that the resilience of major global financial markets has steadily improved, but the resilience of developed and emerging countries differs in different periods. Moreover, extreme capital flow states and crisis events have a considerable negative impact on resilience. According to the panel regression model, further research emphasizes the role of financial development in improving resilience, especially for emerging economies. In addition, our finding shows that, to enhance the resilience of financial markets, it is necessary to focus on the development of both financial markets and financial institutions, especially to improve the depth of financial markets and the access of financial institutions.
This paper provides an analytical overview of the most widely used capital flow datasets. The paper is written as a guide for academics who embark on empirical research projects and for policymakers who need timely information on capital flow developments to inform their decisions. We address common misconceptions about capital flow data and discuss differences between high‐frequency proxies for portfolio flows. In a nowcasting “horse race” we show that high‐frequency proxies have significant predictive content for portfolio flows from the balance of payments (BoP). We also construct a new dataset for academic use, consisting of monthly portfolio flows broadly consistent with BoP data.
We analyze the co-movement between the Credit Default Index (CDX) curve and the S&P 500 index's option volatility surface. We connect the reduced-form no-arbitrage model with the Nelson-Siegel (N-S) model on hazard rate implied from the CDX curve, and identify the levels, slopes, and curvatures from these two markets via the Unscented Kalman Filter (UKF). We find that the changes in the level, slope, and curvature in the CDX curve and those in the volatility surface are correlated due to the bridge of the S&P 500 index return. Finally, the co-movement between the CDX curve and S&P 500 index's volatility surface become stronger after the late 2000s global financial crisis.
We empirically gauge the relative importance of the various push and pull factors for the magnitude of foreign flows to 51 emerging markets (EMs) across quantiles. We propose a quantile regression dynamic panel model with fixed effects and reveal several new findings: (a) Global risk aversion and regional contagion are generally significant across most quantiles. (b) Foreign short-term flows retreat less from EMs with stronger fundamentals during stress episodes. (c) EMs that previously experienced larger portfolio debt and bank inflows tend to suffer more during stress episodes. Hence, we provide novel evidence supporting the global financial cycle hypothesis, investor differentiation hypothesis, and the “more-in-more-out” hypothesis.
This study discusses the relationship between hot money and stock market in China by employing the Autoregressive Distributed Lag (ARDL) and Nonlinear Autoregressive Distributed Lag (NARDL) methods. The data used in this study is quarterly data over the period 2000: Q1 to 2017: Q4. The results show that oil price, economic growth and hot money possess a long-run relationship towards stock market in China, whereas, no effect is found from inflation. The oil price and economic growth are both positively related to stock market while there is a negative relationship from hot money. Furthermore, the study supports the existence of an asymmetric effect between hot money and stock market. The findings imply that policymakers should form better monitoring systems to control the inflow of hot money, thus, strengthening investors’ confidence and avoiding unwanted bubbles in China’s stock market.
We investigate bubble-like dynamics in 22 Emerging Market Economies (EMEs). We identify the existence of synchronized stock markets' exuberance across EMEs before the 2000s Global Financial Crisis (GFC). We also investigate whether international short-term capital flows help to predict such episodes of exuberance. We find that all three types of short-term flows are significant, but international equity flows prove the most robust predictor. International capital flows (especially equity flows) partially explain the synchronization of exuberance detected and thus demand close attention when monitoring bubble-like dynamics.
This paper examines episodes of capital bonanzas and sudden stops in Indonesia by utilising binary response models and several episode-identification approaches. Our identification suggests that whenever bonanza episodes occurred, capital sudden stop episodes followed in a more extended period. The estimations demonstrate that domestic factors are relatively dominant in determining the capital bonanzas, and the federal funds rate has a more significant impact on inducing the probability of capital sudden stops in Indonesia. We also found that Turkey and South Africa are the most contagious economies for Indonesia. This paper proposes some policy reforms to enhance the stability of capital inflows in Indonesia, including financial regulation and public finance policies such as a reverse Tobin tax and market-driven public debt rules.
This paper provides an analytical overview of the most widely used capital flow datasets. The paper is written as a guide for academics who embark on empirical research projects and for policymakers who need timely information on capital flow developments to inform their decisions. We address common misconceptions about capital flow data and discuss differences between high-frequency proxies for portfolio flows. In a nowcasting “horse race” we show that high-frequency proxies have significant predictive content for portfolio flows from the balance of payments (BoP). We also construct a new dataset for academic use, consisting of monthly portfolio flows broadly consistent with BoP data.
This paper provides an analytical overview of the most widely used capital flow datasets. The paper is written as a guide for academics who embark on empirical research projects and for policymakers who need timely information on capital flow developments to inform their decisions. We address common misconceptions about capital flow data and discuss differences between high-frequency proxies for portfolio flows. In a nowcasting "horse race" we show that high-frequency proxies have significant predictive content for portfolio flows from the balance of payments (BoP). We also construct a new dataset for academic use, consisting of monthly portfolio flows broadly consistent with BoP data.
This paper examines the implication of top executive gender on the zombie likelihood of firms listed in China's stock market. Our investigation shows that an increase in female executive percentage can significantly reduce corporate risk and zombie likelihood. This reduction in zombie likelihood is mainly achieved by the financial supervision of the female CFOs, mainly through the channels of quality improvement in information disclosure as well as in corporate governance. By contrast, loans and subsidies from local governments and financial institutions do not improve the performance of listed companies but increase zombie likelihood. Female executives' previous appointments with government agencies and financial institutions increase zombie likelihood as well. The academic background of female executives does not affect zombie likelihood. These findings provide insights into the relationship between executive gender diversity and corporate governance. We provide policy recommendations to help address the issue of zombie firms in China.
Common wisdom generally associates hot money (short-term international capital) with risk in the financial market, while its impact on the uncertainty of the real economy outputs is ignored. Using the Chinese data from 2000 to 2016, we document the aggressive hot money inflows by 2010 and a sudden slow-down afterwards. We find the unidirectional causality from hot money to the industry output, and the bidirectional causality between hot money and the service output. Specifically, with a 1% increase in hot money inflow, there is a 0.29% increase in the industry output and a 0.25% increase in the service output. We further reveal that the short-run variation in hot money flows is the Granger cause of variation in the industry and service outputs, a source of production uncertainty. Moreover, the investigation of six capital-concentrated subsectors provides additional cross-sectional evidence of hot money's heterogeneous effects. Overall, we provide the first empirical evidence on the impact of hot money on the real economy output in China, pointing to a significant risk that volatile hot money flows escalates production uncertainty. These findings lend regulatory insights into risk management and capital control in China.
We explore the possible existence and behavior of hot money in six categories of disaggregated bilateral capital flows (equity inflows, equity outflows, bond inflows, bond outflows, banking credit inflows, and banking credit outflows) for 12 emerging markets vis-à-vis the US from 1995 to 2012 and provides several new findings. First, we identify the existence of hot money in all six categories above and conclude that both gross inflows and gross outflows can be the sources of hot money. Second, hot money in equity inflows (outflows) engages in positive (negative) feedback trading regarding local stock market returns. Third, some categories of hot money have a temporary influence on local stock market returns while the others have a permanent influence, supporting the explanations of both price pressures and information advantage. Finally, local stock market returns in half of our sample countries, which have tightened capital controls during the late 2000s global financial crisis (GFC), are more affected by hot money than in the other half. Our findings confirm several popular conjectures of hot money, and endorse the use of capital controls to limit financial vulnerability in the run-up to and during the GFC.
This study examines whether information from derivative markets is useful for signaling “hot money” and other large capital flows in an economy where the monetary authority pursues a policy of exchange rate stability. It examines the information content of Hong Kong-traded derivative securities for signaling changes in the aggregate balance of the Hong Kong banking system during a period of intense initial public offering activity and speculation on the revaluation of the renminbi. The impact of the Hong Kong Monetary Authority's (HKMA) Convertibility Undertakings on the dynamic relationships among capital flows, stock market volatility, and stock market turnover is examined.
This article profiles the recent evolution and consequences of banking sector globalization. After presenting trends in international banking, the article overviews macroeconomic consequences of banking sector globalization, including the role of banks in the international transmission of shocks, comovements of business cycles, financial crises, and economic growth. Other consequences of banking globalization have parallels with the effects of real-side foreign direct investment, including technology transfers, productivity enhancements, and wage spillovers into the host country. Finally, the article provides arguments that banking globalizing can have important consequences for financial supervision and regulation. IMF Staff Papers (2009) 56, 171–197. doi:10.1057/imfsp.2008.31; published online 3 February 2009
When one region of the world economy experiences a financial crisis, the world-wide availability of investment opportunities declines. As global investors search for new destinations for their capital, other regions will experience inflows of hot money. However, large capital inflows make the recipient countries more vulnerable to future adverse shocks, creating the risk of serial financial crises. This paper develops a formal model of such flows of hot money and the vulnerability to serial financial crises. It analyzes the role for macro-prudential policies to lean against the wind of such capital flows so as to offset the externalities that occur during financial crises. Summarizing the results of our model in a simple policy rule, the paper finds that a 1 percentage point increase in a country's capital inflows/GDP ratio warrants a 0.87 percentage point increase in the optimal level of capital inflow taxation.
Using maximum likelihood Kalman filtering techniques and non-parametric variance ratio statistics, we gauge the relative importance of permanent and temporary components of capital flows to Latin American and Asian developing countries over the period 1988–1997, for the broad categories of flows in the capital account: equity flows (EF), bond flows (BF), official flows (OF), commercial bank credit (BC), and foreign direct investment (FDI). We find relatively low permanent components in EF, BF and OF, while commercial BC flows appear to contain quite large permanent components and FDI flows are almost entirely permanent. These results have a natural interpretation and clear policy implications.
The global imbalance explanation of the financial crisis of 2007–09 suggests that demand for riskless assets from countries with current account surpluses created fragility in countries with current account deficits, most notably in the United States. This paper examines this explanation by analyzing the geography of asset-backed commercial paper (ABCP) conduits set up by large commercial banks. The paper shows that banks in surplus countries as well as banks in deficit countries manufactured riskless assets, totaling over $1.2 trillion, by selling short-term ABCP to risk-averse investors, predominantly U.S. money market funds, and investing the proceeds primarily in long-term U.S. assets. As negative information about U.S. assets became apparent in August 2007, banks in both surplus and deficit countries experienced difficulties in rolling over ABCP and as a result suffered significant losses. The paper concludes that global banking flows, rather than global imbalances, determined the geography of the financial crisis.
This note looks at US$ and DM/Euro denominated government bond spreads relative to US and German benchmark bonds before and after the start of the current financial crisis. The study finds, first, that bond yield spreads before and during the crisis can largely be explained on the basis of economic principles. Second, markets penalise fiscal imbalances much more strongly after the Lehman default in September 2008 than before. There is also a significant increase in the spread on non-benchmark bonds due to higher general risk aversion, and German bonds obtained a safe-haven investment status similar to that of the US which they did not have before the crisis. These findings underpin the need for achieving sound fiscal positions in good times and complying with the Stability and Growth Pact.
The conventional wisdom is that capital flows between developing countries and developed countries are more volatile than can be justified by fundamentals. In this paper we construct a simple model in which frictions in international financial markets in combination with standard debt-default problems lead to volatile capital flows. These flows act as tests of fire for borrowing countries. If a country survives this test, its reputation is enhanced and future capital flows become less volatile. Failing this test is associated with a loss of reputation and a decline in the amount of capital flows.
In the wake of the Mexican and Asian currency turmoil, the subject of financial crises have come to the forefront of academic and policy discussions. This paper analyzes the links between banking and currency crises. The authors find that problems in the banking sector typically precede a currency crisis--the currency crisis deepens the banking crisis, activating a vicious spiral; financial liberalization often precedes banking crises. The anatomy of these episodes suggests that crises occur as the economy enters a recession, following a prolonged boom in economic activity that was fueled by credit, capital inflows, and accompanied by an overvalued currency.
this paper, we extend that work by analyzing the extent to which past crises share common characteristics as to their severity and antecedents in Latin America versus Asia, Europe, 2 and the Middle East. We examine the recent crises in Asia and in Latin America to determine whether the considerable regional differences that we find for the earlier sample are eroding in the 1990s. The paper proceeds as follows: Section II analyzes the regional historical differences in 76 currency crises and 26 banking crises in Argentina, Bolivia, Brazil, Chile, Colombia, Denmark, Finland, Indonesia, Israel, Malaysia, Mexico, Norway, Peru, Phillippines, Spain, Sweden, Thailand, Turkey, Uruguay, and Venezuela in the period 1970 to 1995. Section III focuses on the recent crises; the last section summarizes our conclusions and discusses areas for future research. II. Regional Differences: History Between 1970 and 1995, Latin American (LA) countries suffered, on average, 50 percent more
Restraints on hot money flows are respectable again, if only because of near zero short-term interest rates in the United States and Japan. This volume focuses mainly on Asian economies through overviews and nine specific country studies. It is an invaluable reference work on how governments use ever-changing rules governing banks as well as equity and portfolio investments to insulate their monetary systems from international hot money inflows - Ronald I. McKinnon, Stanford University, US.
Under near zero US interest rates, the international dollar standard malfunctions. Emerging markets (EM) with naturally higher interest rates are swamped with hot money inflows. EM central banks intervene to prevent their currencies from rising precipitately. They lose monetary control and begin inflating. Primary commodity prices rise worldwide unless interrupted by an international banking crisis. This inflation on the dollar's periphery only registers in the US core consumer price index (CPI) with a long lag. The zero interest rate policy also fails to stimulate the US economy as domestic financial intermediation by banks and money market mutual funds is undermined.
We use loan-level data to examine how large international banks reduced their crossborder lending after the collapse of Lehman Brothers. Country, firm, and bank fixed effects allow us to disentangle credit supply and demand and to simultaneously control for the unobserved traits of banks and the countries and firms they lend to.We document substantial heterogeneity in the extent to which different banks retrenched from the same country. Banks reduced credit less to markets that were geographically close; where they were more experienced; where they operated a subsidiary; and where they were integrated into a network of domestic co-lenders.
We study the interrelationship between capital flows, returns, dividend yields and world interest rates in 20 emerging markets. We estimate a vector autoregression with these variables to measure the degree to which lower interest rates contribute to increased capital flows and shocks in flows affect the cost of capital among other dynamic relations. We precede the VAR analysis by a detailed examination of endogenous break points in capital flows and the other variables. These structural breaks are traced to the liberalization of emerging equity markets. Our evidence of structural breaks calls into question past research which estimates VAR models over the full sample. After a liberalization, we find that equity flows increase by 1.4% of market capitalization. We also show that shocks in equity flows initially increase returns which is consistent with a price pressure hypothesis. While the effect is diminished over time, there also appears to be a permanent impact. This is consistent with our finding that our proxy for the cost of capital, the dividend yield, decreases. Finally, our analysis of the transition dynamics from pre-liberalization to post-liberalization suggests that when capital leaves, it leaves faster than it came in. These results may help us understand the dynamics of the recent crises in Latin America and East Asia.
An accident of history, the international dollar standard has greatly facilitated multilateral trade and exchange since 1945. But beginning in 1971, erratic U.S. monetary and exchange rate policies have upset the world's macro economy so as to make foreigners unhappy. Paradoxically, the asymmetrical nature of the dollar standard also makes Americans unhappy because they cannot control their own exchange rate. Although nobody loves the dollar standard, it is a remarkably robust institution that is too valuable to lose and too difficult to replace. Today, rehabilitating the dollar standard requires that American monetary and financial policies be 'internationalized': the Federal Reserve should aim for greater exchange rate stability by adjusting interest rates to prevent runs for or against the dollar, while the U.S. Treasury aims fiscal policy to balance exports and imports. [21]China, now the world's largest exporter and creditor country, has a critical role to play in sustaining the dollar standard. Because the renminbi is not much accepted internationally, China's foreign trade is mainly invoiced in dollars, and interbank payments are cleared in dollars. So helping to stabilize the world dollar standard is in China's, as well as America's (and the world's), own best interests. But how the now dominant 'G-2' rationalize their mutual saving imbalances and debtor-creditor relationship, with China holding trillions of dollars of official exchange reserves, is the key question for sustainability.
This paper analyzes whether equity holdings of international lenders affect the transmission ofcredit supply shocks from developed countries to emerging markets. I exploit the 1998 Russiandebt default as an exogenous credit supply shock to international lenders and trace out the impacton bank lending in Peru. I find that after the shock international lenders with equity holdings in Peruvian banks increased financing to banks in Peru, while international lenders without equityholdings reduced financing to banks in Peru. This effect could be driven either by differential credit supply from international lenders or by heterogeneity in credit demand across banks. I control for credit demand by examining firms that have loans from both banks with international equity holders and banks without international equity holders and find evidence for the credit supply explanation. The change in credit supply has real effects: I find a lower bankruptcy rate among firms borrowing from banks with international equity holders than among firms borrowing from banks without international equity holders. These results suggest that equity holdings of international lenders mitigate the transmission of credit supply shocks to emerging markets.
Economic conditions in China are of considerable concern to U.S. policy makers, given the potential impact of China's economy on the global and U.S. economy. The recent large inflow of financial capital into China, commonly referred to as "hot money," has led some economists to warn that such flows may have a destabilizing effect on China's economy. There is no formal definition of "hot money," but the term is most commonly used in financial markets to refer to the flow of funds (or capital) from one country to another to earn a short-term profit on interest rate differences and/or anticipated exchange rate shifts. These speculative capital flows are called "hot money" because they can move very quickly in and out of markets, potentially leading to market instability. Chinese estimates of the amount of "hot money" in China vary from 1.75 trillion. In an op-ed column in the "Financial Times," two China experts wrote of hot money's "ensuing money creation is fueling rising inflation, systemic overinvestment, and an overextended banking system." There also are indications that "hot money" flows have played a role in the recent rise and fall of China's stock and real estate markets. Other economists have expressed concerns that efforts by the Chinese government to control "hot money" inflows could have significant negative consequences for the U.S. and global economies in the form of slower growth, greater inflation, or both. This report will be updated as circumstances warrant.
This paper provides evidence of the role of globalized banks in transmitting financial stresses to the real economy during the global financial crisis. A novel dataset is constructed from quarterly balance sheet reports provided by all UK-resident banks to the Bank of England. I find that the shock to bank funding from non-resident creditors was transmitted domestically through a significant reduction in bank credit supply. Resident subsidiaries and branches of foreign-owned banks reduced lending by a larger amount than domestically-owned banks, while the latter calibrated the reduction in domestic lending more closely to the size of the funding shock.
This paper analyzes the drivers of international waves in capital flows. We build on the literature on "sudden stops" and "bonanzas" to develop a new methodology for identifying episodes of extreme capital flow movements using quarterly data on gross inflows and gross outflows, differentiating activity by foreigners and domestics. We identify episodes of "surge", "stop", "flight" and "retrenchment" and show how our approach yields fundamentally different results than the previous literature that used measures of net flows. Global factors, especially global risk, are important determinants of these episodes. Contagion, especially through the bilateral exposure of banking systems, is important in determining stop and retrenchment episodes. Domestic macroeconomic characteristics are generally less important, although changes in domestic economic growth influence episodes caused by foreigners. We find little role for global interest rates and global liquidity in explaining surges in foreign capital flows (independent of global risk and global growth). We also find little role for capital controls in reducing capital flow waves. The results help discern between different theoretical approaches explaining crises and capital flow volatility.
This paper applies the overreaction hypothesis of De Bont and Thaler [De Bont, W., Thaler, R., 1985. Does stock market overreact? Journal of Finance 40(3), 793-805], developed for stock price behavior, to capital flows to emerging markets. We find that a surge in capital flows, or what we call a capital boom, can predict future sharp contractions in capital flows, or sudden stops. We use a large list of possible economic fundamentals as control variables, and the results show that the best predictor of a sudden stop is a preceding capital boom. Moreover, the probability of a country undergoing a sudden stop increases considerably with the length of the boom: this probability more than doubles when the boom is three years old, and rises by three to four times when the boom lasts for four years. These results are interesting for two reasons. In the first place, they contradict previous studies that emphasize worsening fundamentals as the ultimate cause of a sudden stop. Second, they are of policy interest because of the enormous negative impacts that sudden stops have on the real economy.
We examine the role of high-frequency traders (HFTs) in price discovery and price efficiency. Overall HFTs facilitate price efficiency by trading in the direction of permanent price changes and in the opposite direction of transitory pricing errors, both on average and on the highest volatility days. This is done through their liquidity demanding orders. In contrast, HFTs’ liquidity supplying orders are adversely selected. The direction of buying and selling by HFTs predicts price changes over short horizons measured in seconds. The direction of HFTs’ trading is correlated with public information, such as macro news announcements, market-wide price movements, and limit order book imbalances.
Foreign banks pulled significant funding from their U.S. branches during the Great Recession. We estimate that the average-sized branch experienced a 12 percent net internal fund “withdrawal,” with the fund transfer disproportionately bigger for larger branches. This internal shock to the balance sheets of U.S. branches of foreign banks had sizable effects on their lending. On average, for each dollar of funds transferred internally to the parent, branches decreased lending supply by about forty to fifty cents. However, the extent of the lending effects was very different across branches, depending on their precrisis modes of operation in the United States.
I exploit the 1998 Russian default as a negative liquidity shock to international banks and analyze its transmission to Peru. I find that after the shock international banks reduce bank-to-bank lending to Peruvian banks and Peruvian banks reduce lending to Peruvian firms. The effect is strongest for domestically owned banks that borrow internationally, intermediate for foreign-owned banks, and weakest for locally funded banks. I control for credit demand by examining firms that borrow from several banks. These results suggest that international banks transmit liquidity shocks across countries and that negative liquidity shocks reduce bank lending in affected countries.
The globalization of banking in the United States is influencing the monetary transmission mechanism both domestically and in foreign markets. Using quarterly information from all U.S. banks filing call reports between 1980 and 2006, we show that globalized banks activate internal capital markets with their overseas affiliates to insulate themselves partially from changes in domestic liquidity conditions. The existence of these internal capital markets directly contributes to an international propagation of domestic liquidity shocks to lending by affiliated banks abroad. While these results imply a substantially more active lending channel than documented in Kashyap and Stein (2000), they also imply that the lending channel within the United States is declining in strength as banking becomes more globalized and monetary transmission abroad likewise increases in strength.
This paper shows that banks exhibit a weaker (stronger) home bias in the extension of new loans when funding conditions in their home country improve (deteriorate). We refer to these changes in home bias as flight home and flight abroad effects, respectively, and show that they are unrelated to the better known flight to quality effect that arises during periods of market turmoil. Our results also indicate that global banks amplify the effect of home-grown shocks on foreign countries while they are a stabilizing factor for the supply of credit in their home countries.
The causes of the 2008 collapse and subsequent surge in global capital flows remain an open and highly controversial issue. Employing a factor model coupled with a dataset of high-frequency portfolio capital flows to 50 economies, the paper finds that common shocks – key crisis events as well as changes to global liquidity and risk – have exerted a large effect on capital flows both in the crisis and in the recovery. However, these effects have been highly heterogeneous across countries, with a large part of this heterogeneity being explained by differences in the quality of domestic institutions, country risk and the strength of domestic macroeconomic fundamentals. Comparing and quantifying these effects shows that common factors (“push” factors) were overall the main drivers of capital flows during the crisis, while country-specific determinants (“pull” factors) have been dominant in accounting for the dynamics of global capital flows in 2009 and 2010, in particular for emerging markets.
The current crisis saw an unprecedented collapse in international capital flows after years of rising financial globalization. We identify the stylized facts and main drivers of this development. The retrenchment in international capital flows is a highly heterogeneous phenomenon: first, across time, being especially dramatic in the wake of the Lehman Brothers’ failure; secondly, across types of flows, with banking flows being the hardest hit due to their sensitivity of risk perception; and thirdly, across regions, with emerging economies experiencing a shorter-lived retrenchment than developed economies. Our econometric analysis shows that the magnitude of the retrenchment in capital flows across countries is linked to the extent of international financial integration, its specific nature – with countries relying on bank flows being the hardest hit – as well as domestic macroeconomic conditions and their connection to world trade flows.
— Gian-Maria Milesi-Ferretti and Cédric Tille
Our model shows that deterioration of debt market liquidity not only leads to an increase in liquidity premium of corporate bonds but also credit risk. The latter effect originates from firms' debt rollover. When liquidity deterioration causes a firm to suffer losses in rolling over its maturing debt, equity holders bear the losses while maturing debt holders get paid in full. This conflict leads the firm to default at a higher fundamental threshold. Our model demonstrates an intricate interaction between liquidity premium and default premium and highlights the role of short-term debt in exacerbating rollover risk.
This article studies whether the volume and composition of capital flows affect the degree of credit crunch during the 2007–2009
crisis. Using data on 3,823 firms in 24 emerging countries, we find that, on average, the decline in stock prices was more
severe for firms that are intrinsically more dependent on external finance for working capital. Interestingly, while the volume
of capital flows per se has no significant effect, the composition matters a lot. In particular, greater dependence on non-FDI
capital inflows before the crisis worsens the credit crunch during the crisis, while exposure to FDI alleviates the liquidity
constraint.
This paper examines the volatility of capital flows following the liberalization of financial markets. Utilizing a panel data set of overlapping data, the paper focuses on the response of foreign direct investment, portfolio flows, and other debt flows to financial liberalization. The financial liberalization variable comes from the chronology and index developed by Kaminsky and Schmukler [Kaminsky, G.L. and Schmukler, S.L., 2003, Short-run pain, long-run gain: The effects of financial liberalization, IMF Working Paper WP/03/34.]. Different types of capital flows are found to respond differently to financial liberalization. Surprisingly, portfolio flows appear to show little response to capital liberalization while foreign direct investment flows show significant increases in volatility, particularly for the emerging markets considered.
We examine the view that the recent East Asian crisis was precipitated by bursting asset price bubbles, which had been fuelled by strong capital inflows that were largely the result of a moral hazard problem in financial intermediation, and was exacerbated by a vicious cycle of asset price deflation and incipient and actual capital flight. We find evidence of stock market bubbles in all East Asian economies examined, although not in Australia. We examine various categories of capital flows to these countries and find, in particular, relatively high reversible components in portfolio flows to East Asian economies.
This paper investigates the factors motivating the large capital flows to a number of developing countries in recent years. We use monthly US capital flows to nine Latin American and nine Asian countries to analyze the behavior of bond and equity flows. Employing a panel data approach, we find that although global factors—the drop in US interest rates and the slowdown in US industrial production—are important in explaining capital inflows, country-specific developments are at least as important, especially for Asia. We also find that equity flows are more sensitive than bond flows to global factors, but that bond flows are generally more sensitive to a country's credit rating and secondary market debt price.
We study price pressures in stock prices-price deviations from fundamental value due to a risk-averse intermediary supplying liquidity to asynchronously arriving investors. Empirically, twelve years of daily New York Stock Exchange intermediary data reveal economically large price pressures. A $100,000 inventory shock causes an average price pressure of 0.28% with a half-life of 0.92 days. Price pressure causes average transitory volatility in daily stock returns of 0.49%. Price pressure effects are substantially larger with longer durations in smaller stocks. Theoretically, in a simple dynamic inventory model the 'representative' intermediary uses price pressure to control risk through inventory mean reversion. She trades off the revenue loss due to price pressure against the price risk associated with remaining in a nonzero inventory state. The model's closed-form solution identifies the intermediary's relative risk aversion and the distribution of investors' private values for trading from the observed time series patterns. These allow us to estimate the social costs-deviations from constrained Pareto efficiency-due to price pressure which average 0.35 basis points of the value traded.
There is a debate on whether some forms of financial flows offer better protection against crises than others. Using a large panel data set that includes advanced, emerging, and developing economies during 1970--2003, this article analyzes the behavior of several types of flows: foreign direct investment (FDI), portfolio equity investment, portfolio debt investment, other flows to the official sector, other flows to banks, and other flows to the nonbank private sector. Differences across types of flows are limited with respect to volatility, persistence, cross-country comovement, and correlation with growth at home or in the world economy. However, consistent with conventional wisdom, FDI is the least volatile form of financial flow, when the average size of net or gross flows is taken into account. The differences are striking during "sudden stops" in financial flows (defined as drops in total net financial inflows of more than percentage points of GDP compared with the previous year). In such episodes, FDI is remarkably stable, and portfolio equity seems to play a limited role. Portfolio debt experiences a reversal, though it recovers relatively quickly, and other flows (including bank loans and trade credit) experience severe drops and often remain depressed for a few years. Copyright The Author 2007. Published by Oxford University Press on behalf of the International Bank for Reconstruction and Development / the world bank . All rights reserved. For permissions, please e-mail: journals.permissions@oxfordjournals.org, Oxford University Press.
The paper investigates the extent of the impact from "hot money" or speculative capital inflow on the fluctuations of China's real estate market and stock market. The results indicate that hot money has driven up property prices as well as contributed to the accelerating volatilities in both markets due to its enormous size and its short-term characteristic of investing. In particular, we find that hot money ranks as the second largest contributor in the fluctuations of China's real estate prices. In the "risky" regime, which corresponds to more inflows and higher volatility of hot money, the effects are even more prominent.
Global banks played a significant role in the transmission of the 2007 to 2009 crisis to emerging market economies. We examine the relationships between adverse liquidity shocks on main developed-country banking systems to emerging markets across Europe, Asia, and Latin America, isolating loan supply from loan demand effects. Loan supply in emerging markets was significantly affected through three separate channels: a contraction in direct, cross-border lending by foreign banks; a contraction in local lending by foreign banks’ affiliates in emerging markets; and a contraction in loan supply by domestic banks resulting from the funding shock to their balance sheet induced by the decline in interbank, cross-border lending. Policy interventions, such as the Vienna Initiative introduced in Europe, influenced the lending channel effects on emerging markets of head office balance sheet shocks.
The global financial crisis clearly started with problems in the U.S. subprime sector and spread across the world from there. But was the direct exposure of foreigners to the U.S. financial system a key driver of the crisis, or did other factors account for its rapid contagion across the world? To answer this question, we assessed whether countries that held large amounts of U.S. mortgage-backed securities (MBS) and were highly dependent on dollar funding experienced a greater degree of financial distress during the crisis. We found little evidence of such "direct contagion" from the United States to abroad. Although CDS spreads generally rose higher and bank stocks generally fell lower in countries with more exposure to U.S. MBS and greater dollar funding needs, these correlations were not robust, and they fail to explain the lion's share of the deterioration in asset prices that took place during the crisis. Accordingly, channels of "indirect contagion" may have played a more important role in the global spread of the crisis: a generalized run on global financial institutions, given the opacity of their balance sheets; excessive dependence on short-term funding; vicious cycles of mark-to-market losses driving fire sales of MBS; the realization that financial firms around the world were pursuing similar (flawed) business models; and global swings in risk aversion. The U.S. subprime crisis, rather than being a fundamental driver of the global crisis, may have been merely a trigger for a global bank run and for disillusionment with a risky business model that already had spread around the world.
We consider the debt capacity of a risky asset when debt is being rolled over and there is a liquidation cost in case of default. We show that debt capacity depends on how information about the quality of the asset is revealed. When the information structure is based on “optimistic” expectations, the arrival of no news about the asset is good news; under this structure, debt capacity does not depend upon rollovers and liquidation cost, and is simply equal to expected cash flows from the asset. In contrast, when the information structure is based on “pessimistic” expectations, no news about the asset is bad news; under this structure, debt capacity of the asset is decreasing in the liquidation cost and frequency of rollovers. In the limit, as the number of rollovers becomes unbounded, the debt capacity goes to zero even for an arbitrarily small default risk. Our model explains why markets for rollover debt, such as asset-backed commercial paper, may experience sudden freezes. The model also provides an explicit formula for the haircut in secured borrowing or repo transactions.
The flow of capital between nations, in principle, brings benefits to both capital-importing and capital-exporting countries. But very large flows can also create new exposures and bring new risks. The failure to analyse and understand such risks, excessive haste in liberalising the capital account and inadequate prudential buffers to cope with the greater volatility in more market-based forms of capital allocation have at one time or another compromised financial or monetary stability in many emerging market economies. On the other hand, rigidities in capital account management can also lead to difficulties in macroeconomic and monetary management. This Report takes stock of the policy debate in this complex area over the past 20 years and examines the vulnerabilities associated with these capital movements. It finds that it is a combination of policies - sound macroeconomic policies, prudent debt management, exchange rate flexibility, the effective management of the capital account, the accumulation of appropriate levels of reserves as self-insurance and the development of resilient domestic financial markets - that provides the optimal response to the large and volatile capital flows to the EMEs. How these elements are best combined will depend on the country and on the period: there is no "one size fits all".
China's financial conundrum arises from two sources. First, its large saving (trade) surplus results in a currency mismatch because it is an immature creditor that cannot lend in its own currency. Instead, foreign currency claims (largely US dollars) build up within domestic financial institutions. Second, economists, both American and Chinese, mistakenly attribute the surpluses to an undervalued RMB. To placate the USA, the result was a gradual and predictable appreciation of the RMB against the dollar of 6 percent or more per year from July 2005 to July 2008. Together with the fall in US interest rates since mid-2007, this oneway bet in the foreign exchanges markets not only attracted hot money inflows but inhibited private capital outflows from financing China's huge trade surplus. Therefore, the People's Bank of China had to intervene heavily to prevent the RMB from ratcheting upwards, and so became the country's sole international financial intermediary as official exchange reserves exploded. Because of the currency mismatch, floating the RMB is neither feasible nor desirable, and a higher RMB would not reduce China's trade surplus. Instead, monetary control and normal private-sector finance for the trade surplus require a return to a credibly fixed nominal RMB/USD rate similar to that which existed between 1995 and 2004. However, for any newly reset RMB/USD rate to be credible as a monetary anchor, foreign "China bashing" to get the RMB up must end. Then the stage would be set for fiscal expansion to both stimulate the economy and reduce its trade surplus. Copyright (c) 2009 The Authors Journal compilation (c) 2009 Institute of World Economics and Politics, Chinese Academy of Social Sciences.
A distinction is often made between short-term and long-term capital flows: the former are deemed unstable hot money and the
latter are deemed stable cold money. Using time-series analysis of balance of payments data for five industrial and five developing
countries, we find that in most cases the labels “short-term” and “long-term” do not provide any information about the time-series
properties of the flow. In particular, long-term flows are often as volatile as short-term flows, and the time it takes for
an unexpected shock to a flow to die out is similar across flows. long-term flows are also at least as unpredictable as short-term
flows, and knowledge of the type of flow does not improve the ability to forecast the aggregate capital account.
This article examines U.S. equity flows to emerging stock markets from 1978 to 1991 and draws three main conclusions. First,
despite the recent increase in U.S. equity investment in emerging stock markets, the U.S. portfolio remains strongly biased
toward domestic equities. Second, of the fraction of the U.S. portfolio that is allocated to foreign equity investment, the
share invested in emerging stock markets is roughly proportional to the share of the emerging stock markets in the global
market capitalization value. Third, the volatility of U.S. transactions in emerging-market equities is higher than in other
foreign equities. The normalized volatility of U.S. transactions appears to be falling over time, however, and we find no
relation between the volume of U.S. transactions in foreign equity and local turnover rates or volatility of stock returns.
This article focuses on the determinants of the large portfolio flows from the United States to Latin American and Asian countries during 1988-92. Cointegration techniques reveal that both domestic and global factors explain bond and equity flows to developing countries and represent significant long-run determinants of portfolio flows. The article also investigates the dynamics of portfolio flows by estimating seemingly unrelated error-correction models. Global and country-specific factors are equally important in determining the long-run movements in equity flows for both Asian and Latin American countries, while global factors are much more important than domestic factors in explaining the dynamics of bond flows. U.S. interest rates are a particularly important determinant of the short-run dynamics of portfolio, especially bond flows to developing countries. Copyright 1997 by Oxford University Press.
Business cycles in different regions of the United States tend to synchronize. This study investigates the reasons behind this synchronization of business cycles and the consequent formation of a national business cycle. Trade between regions may not be strong enough for one region to "drive" business cycle fluctuations in another region. This study suggests that regional business cycles synchronize due to a nonlinear "mode-locking" process in which weakly coupled oscillating systems (regions) tend to synchronize. There is no definitive test for mode-lock. However, simulations, correlations, Granger causality tests, tests for nonlinearities, vector autoregressions, and spectral analysis reveal modest econometric support for the regional mode-locking hypothesis of business cycle synchronization. Copyright Blackwell Publishers, 2005
This paper employs response surface regressions based on simulation experiments to calculate distribution functions for some well-known unit root and cointegration test statistics. The principal contributions of the paper are a set of data files that contain estimated response surface coefficients and a computer program for utilizing them. This program, which is freely available via the Internet, can easily be used to calculate both asymptotic and finite-sample critical values and P-values for any of the tests. Graphs of some of the tabulated distribution functions are provided. An empirical example deals with interest rates and inflation rates in Canada. Copyright 1996 by John Wiley & Sons, Ltd.
There is a debate on whether some forms of financial flows offer better crisis protection than others. Using a large panel of advanced, emerging, and developing countries during 1970-2003, this paper analyzes the behavior of various types of flows: foreign direct investment (FDI), portfolio equity investment, portfolio debt investment, other flows to the official sector, other flows to banks, and other flows to the non-bank private sector. Differences across types of flows are limited with respect to volatility, persistence, cross-country comovement, and correlation with growth at home or in the world economy. However, consistent with conventional wisdom, FDI is found to be the least volatile form of financial flows when taking into account the average size of net or gross flows. The differences are striking during "sudden stops" in financial flows (defined as drops in total net financial inflows by more than 5 percentage points of GDP compared with the previous year): in such episodes, FDI is remarkably stable; portfolio equity also seems to play a limited role; portfolio debt experiences a reversal, though it recovers relatively quickly; and other flows (including bank loans and trade credit) experience severe drops and remain depressed for a few years.
We examine the impact of liquidity shocks by exploiting cross-bank liquidity variation induced by unanticipated nuclear tests in Pakistan. We show that for the same firm borrowing from two different banks, its loan from the bank experiencing a 1 percent larger decline in liquidity drops by an additional 0.6 percent. While banks pass their liquidity shocks on to firms, large firms— particularly those with strong business or political ties—completely compensate this loss by additional borrowing through the credit market. Small firms are unable to do so and face large drops in overall borrowing and increased financial distress. (JEL E44, G21, G32, L25)
The size of Japanese bank lending operations in the United States enables the authors to use U.S. banking data to investigate the extent to which the sharp decline in Japanese stock prices was transmitted to the United States via U.S. branches of Japanese parent banks, as well as to identify a supply shock to U.S. bank lending that is independent of U.S. loan demand. They find that binding risk-based capital requirements associated with the Japanese stock market decline resulted in a decrease in lending by Japanese banks in the United States that was both economically and statistically significant. Copyright 1997 by American Economic Association.
U.S. trading in non-U.S. stocks has grown dramatically. Round-the-clock, these stocks trade in the home market, in the U.S. market and, potentially, in both markets simultaneously. We develop a general methodology based on a state space model to study 24-hour price discovery in a multiple markets setting. As opposed to the standard variance ratio approach, this model deals naturally with (i) simultaneous quotes in an overlap, (ii) missing observations in a non-overlap, (iii) noise due to transitory microstructure effects, and (iv) contemporaneous correlation in returns due to market-wide factors. We provide an application of our model to Dutch-U.S. stocks. Our findings suggest a minor role for the NYSE in price discovery for Dutch shares, in spite of its non-trivial and growing market share. The results differ significantly from the variance ratio approach.
It is widely known that when there are errors with a moving-average root close to -1, a high order augmented autoregression is necessary for unit root tests to have good size, but that information criteria such as the AIC and the BIC tend to select a truncation lag (k) that is very small. We consider a class of Modified Information Criteria (MIC) with a penalty factor that is sample dependent. It takes into account the fact that the bias in the sum of the autoregressive coe#cients is highly dependent on k and adapts to the type of deterministic components present. We use a local asymptotic framework in which the moving-average root is local to -1 to document how the MIC performs better in selecting appropriate values of k. In monte-carlo experiments, the MIC is found to yield huge size improvements to the DF GLS and the feasible point optimal P T test developed in Elliott, Rothenberg and Stock (1996). We also extend the M tests developed in Perron and Ng (1996) to allow for GLS ...