Global Risk and Market Conditions,** (with Francesca Carrieri) 

[International Review of Economics and Finance, 2023, 83(1),51--70, doi:10.1016/j.iref.2022.08.012]

Abstract: In a large sample of developed and emerging markets, we show in a conditional setting that globally traded assets such as currencies and international bonds can proxy for global state variables. We find that, differently from market risk, intertemporal risk matters particularly at times when global markets are not in normal economic conditions. Relying on time-variation for prices of risk helps us capture the hedging component, especially the negative one, stemming from proxies like the yen and global sovereign bonds. Our results show that global uncertainty measured by realized world volatility is an important channel for intertemporal risk. 

Accepted for presentation in: Telfer Accounting and Finance Conference Ottawa, Candada 2016; Financial Management Association International (FMA), Florida, USA 2015; European Finance Association (EFA), Vienna, Austria 2015; International Conference of the French Finance Association (AFFI), Cergy, France 2015; European Financial Management Association (EFMA),  Breukelen, Netherlands 2015; Midwest Finance Association (MFA), Chicago, USA 2015 

**An earlier version of the paper, previously circulated as "Pricing Together Developed and Emerging Markets with Multiple Risk Factors".

Can Cross-Border Funding Frictions Explain Financial Integration Reversals?, (with Francesca Carrieri and Aytek Malkhozov)

 [Review of Financial Studies, 2022,35:1,394-437, doi:10.1093/rfs/hhab009  ]

Abstract:  We show that constraints on using leverage for foreign positions can act as an international investment barrier. Guided by an international CAPM with leverage constraints, we use observed stock prices to measure the variation in the magnitude and the implicit cost of such cross-border funding barriers. Our measure helps explain the dynamics of global market integration and, in particular, its reversals documented in the literature but not explained by other international investment barriers. We confirm our results using alternative financial integration measures, international capital flows, and institutional portfolio holdings. 

Accepted for presentation in:  Western Finance Association (WFA), California, US 2019;  West Coast Workshop in International Finance (WCWIF), Seattle, US 2019; EMG-ECB Workshop on International Capital Flows, London, UK 2018; Fed/UMD Short-Term Funding Markets Conference, Washington DC, USA 2018; Annual Financial Market Liquidity Conference, Budapest, Hungary2017; Financial Management Association International (FMA), Boston, USA 2017; Northern Finance Association (NFA), Halifax, Canada 2017; International Workshop on Financial System Architecture & Stability (IWFSAS), Montreal, Canada 2017; International Finance and Banking Society (IFABS), Oxford, UK 2017;

Government Real Estate Interventions and the Stock Market, (with Karolina Krystyniak)

[International Review of Financial Analysis,  forthcoming, doi:10.1016/j.irfa.2021.101742]

Abstract: We study the spillover of government interventions in the real estate market to the stock market. We find that the more active mutual funds decreased ownership in equities with no short-term reversal. Furthermore, they increased ownership in the finance sector stocks without significant changes to their real estate equity holdings. The interventions affecting the riskiness of the finance sector stocks triggered a larger trading response than the ones focused on the real estate sector stocks’ cash flows. Overall, the spillover of the housing market shocks to the stock market seems to be materialized mostly through the discount rate channel. 

Drivers of Economic and Financial Integration: A Machine Learning Approach, (with Lilian Ng, Bruno Solnik)

[Journal of Empirical Finance, 2021, 61: 82-102. doi:10.1016/j.jempfin.2020.12.005 ]

Abstract: We propose a new approach to identify drivers of global market integration using an advanced machine learning technique. We differentiate across economic and financial integration as well as across emerging and developed countries. Our approach allows for nonlinear relationships, corrects for over-fitting, and is less prone to noise. Moreover, it is able to tackle a large number of highly correlated explanatory variables and controls for multicollinearity. Results suggest that general economic growth, increasing international trade, and contained population growth have helped emerging countries to catch up to the level of the economic integration of developed countries. However, slow financial development and a high level of investment riskiness have hindered the speed of emerging countries' financial integration. Furthermore, the results suggest that integration is a gradual process and is not driven by cyclical or transitory events.  

International Market Integration: A Survey, (with Lilian Ng)

[Asia Pac J Financ Stud, 2020, 49: 161-185. doi:10.1111/ajfs.12297 , Lead Article] 

Abstract: Market integration is a canonical topic in international finance. The question of whether and to what extent markets are integrated with the global economy has motivated one of the largest literature in this field. Given this vast body of research, this survey shall only focus on the theoretical and empirical studies on one aspect of market integration -- the {\it equity} market integration. It reviews the evolution of various approaches employed in studying market integration. This survey discusses the recent empirical findings on cross-sectional and time-series dynamics of integration across developed and emerging markets. It also describes the empirical estimation of three current measures of market integration and discusses their  usefulness as well as limitations. Finally, the survey provides a few future directions for this line of research.

Emerging Markets are Catching Up: Economic or Financial Integration? , (with Lilian Ng and Bruno Solnik)

[Journal of Financial and Quantitative Analysis, 2020, 55(7), 2270-2303. doi:10.1017/S0022109019000681]

data and code

Abstract: We propose a simple metric to measure two aspects of integration, namely economic and financial integration, and then examine their short- and long-run dynamics using a smooth-transition dynamic conditional correlation model that allows for trends in correlation while controlling for volatility. Developed countries exhibit greater degrees of financial and economic integration than emerging countries, but the integration gap is smaller for economic than for financial integration. While the financial integration gap between developed and emerging markets remains large throughout the sample period, emerging economies have caught up with their developed counterparts in economic integration in recent years.

Accepted for presentation in: Northern Finance Association (NFA), Vancouver, Canada 2019;  Telfer Annual Conference on Accounting and Finance, Ottawa, Canada 2019  ; Financial Management Association (FMA), San Diego, US 2018; China International Conference in Finance (CICF), Tianjin, China 2018; Asian Finance Association (AsianFA) 2018, Tokyo, Japan 2018; Finance Down Under, Melbourne, Australia 2018;  FMA Asia Pacific, Hong Kong, 2018; Conference on Asia-Pacific Financial Markets, Seoul, Korea 2017

Firm Foreign Activity and the Geography of Exchange Rate Risk, (with Francesca Carrieri)

Abstract: Globally-focused firms, more than domestic ones, are the key drivers of foreign exchange rate (FX) risk. They explain a larger fraction of the factors’ variation and have higher FX exposure, specifically during the home currency depreciation. Their exposure is higher in countries more dependent on the export sector and to neighbors’ currencies, in line with gravity effects. Consistent with the geography of FX risk, those in the core of the global trade network are less exposed, especially to relatively close currencies, reflecting diversification benefits. Overall, we find the economic origins of FX risk pricing in the trade channel over investment. 

Accepted for presentation in: Global Finance Conference, Treviso, Italy; China International Conference in Finance (CICF), Shanghai, China, 2023; Conference of the French Finance Association (AFFI), Bordeaux, France, 2023; Southern Finance Association (SFA), Key West, US, 2022; International Risk Management Conference (IRMC), Bari, Italy, 2022; Asia FA, Hong Kong, 2022; US. Midwest Finance Association (MFA), Chicago, US, 2022

Prices of Risk and the Business Cycle, (with Francesca Carrieri)

Abstract: We estimate in a linear regression framework an asset pricing model that is both intertemporal and fully conditional. Using time-varying quantities of risk as regressors, we focus our analysis on the time-varying prices of risk to capture investors’ assessment of the shift in investment opportunities through the economic cycle. Separately with each information variable, we show that the reward for intertemporal risk is decreasing during recessions with the proxy that negatively predicts market returns. This evidence stands opposite to our findings for the compensation for market risk. When combining all information variables we find that in statistical terms the conditional price for intertemporal risk with this proxy is relatively more significant than the price of market risk at the end of an expansion and during recessions. Thus differences in the two sources of risk are heightened in this phase of the cycle since holding assets with weak or negative correlation with the market becomes crucial especially at these times. The relative importance of intertemporal risk in recessions is also supported by the reduction in the unexplained portion of the asset pricing model for those periods.

Accepted for presentation in: Econometric Society World Congress, Montreal, Canada 2015; European Financial Management Association (EFMA),  Breukelen, Netherlands 2015