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Britain’s decision to leave the European Union (a process known as Brexit) had and will have a wide effect on many spheres. The effects were particularly visible on the financial markets in the short run. The process could lead to political, legal and economic disintegration, a process in which the United Kingdom would move further from the European Union.
We decided to analyze the change in financial integration that the referendum could have triggered. There are a large number of definitions, along with many measures for the concept of financial integration. We decided to follow a portfolio manager’s point of view and to define the integration as the process leading to higher correlation between returns of companies from different countries. Our measures are therefore based on the correlations between the returns generated in the United Kingdom and those generated by European Union firms.
We use three measures: a comparison between pre-referendum and post-referendum correlations; a 6-month rolling-window correlation; a DCC-GARCH model. We show theoretically that the DCC-GARCH model has some advantages over the rolling-window correlation. We carry our analysis at the country and sector level. We also analyze the change in correlation of UK-centred and foreign-centred firms.
We find that the referendum led to a decreased of the correlations between all indices, at the country and sector level, often only temporarily. We found that most correlations regained their pre-referendum level at the end of the sample. The effects varied depending on the sector or on the geographic orientation of the firm. Our robustness checks (mean equation, order of the GARCH, dataset) confirm our results.
In a further step, we decided to estimate the relationship between conditional correlation and conditional volatility (the square root of the conditional variance) by running a regression. We show that for most sectors, there is a positive relationship between the conditional correlation and the conditional volatility. This is an undesirable feature for diversification purposes as it implies that the correlation between indices is higher when the volatility in one of the two economies is higher.

Brexit --- Financial integration --- DCC GARCH --- Conditional Correlations --- Countries --- sectors --- Conditional Volatility --- Sciences économiques & de gestion > Méthodes quantitatives en économie & gestion

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Recent work on China's accession to the World Trade Organizations pays little attention to the wave of reforms in China in the 1980s and 1990s. These reforms created the preconditions for accession and strongly influenced its outcomes. The preeminence of processing trade at the time of accession sharply reduced the impact of accession-related tariff reductions on exports and set the stage for China's increases in domestic value added and reduction in China's involvement in global production sharing since that time. The assessment in this paper, based on export data and simulation results on the ex ante accession-related effects on export volumes in the literature, finds that the accession must have increased China's real export growth by at most 6 percentage points between 1997 and 2005. This effect is substantial, but not as large as suggested by the difference between the pre- and post-accession export growth rates in the four years before and after accession. This is because the influence of cyclical fluctuations related to the Asian financial crisis and the U.S. dot-com crash dampened export growth in the period before accession in 2001 and accelerated it afterward.

Duty Exemptions --- Export Competitiveness --- Export Processing --- Exports --- Globalization and Financial Integration --- International Economics and Trade --- Trade Policy --- World Trade Organization --- WTO

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Small emerging economies, despite their significant growth, lack the scale to develop thriving capital markets from their local investor and issuer base that are able to deliver the benefits of a large, mature market. Slovenia is such an example. Despite the necessary infrastructure in place, trading has remained thin and issuance activity has been dormant. This paper proposes a two-pronged strategy for capital market development that leverages the existing setup in the context of regional integration such as within the EU. While using the case of Slovenia, this path might be indicative for other small countries that are part of a larger economically integrated region.

Finance: General --- Investments: General --- General Financial Markets: General (includes Measurement and Data) --- Finance --- Investment & securities --- Capital markets --- Stock markets --- Financial integration --- Securities markets --- Securities --- Capital market --- Stock exchanges --- International finance --- Financial instruments --- Slovenia, Republic of

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Financial globalization has gathered attention since the early 1990s because of its macro-financial implications and growing importance. But financial globalization has taken shape via different forms over time. This paper examines two important, concurrent dimensions of financial globalization: diversification and offshoring. The diversification dimension refers to the increase in foreign assets and liabilities in countries' portfolios. Offshoring is related to the reallocation of financial activities to international markets. The former focuses on who holds the assets, the latter on where transactions take place. The authors find that globalization via the diversification channel expanded throughout the world during the 2000s, as domestic residents invested more abroad and foreigners increased their investments at home, generating more cross-border holdings. However, financial globalization via offshoring displays more mixed patterns, with variations across markets and countries. The paper also shows that the nature of financing through both diversification and offshoring has improved for emerging countries.

Banks & Banking Reform --- Bond markets --- Debt Markets --- Domestic financial markets --- Economic Theory & Research --- Emerging Markets --- Equity markets --- International financial integration --- International financial markets --- Macroeconomics and Economic Growth --- Mutual Funds

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The simmering sovereign debt crisis in the Euro Zone represents a looming threat to the recovery of the world economy and could lead to a renewed global financial crisis. The purpose of this paper is to analyze the root causes of the crisis in Europe and assess the extent to which it was driven by the global financial crisis and by factors internal to Europe, notably the adoption of the common currency. Adoption of the euro led to convergence of interest rates in periphery countries to the levels in core countries and, in combination with rising capital inflows owing to greater financial integration, set off a consumption and real estate boom in periphery countries, leading to higher growth and increases in government revenue and spending. The resulting real appreciation led to a loss of competitiveness in periphery countries, adversely affecting export performance and causing rising current account imbalances. While the fiscal position remained manageable before the crisis owing to rising revenue, the recession brought about by the global financial crisis led to the burst of real estate bubbles and a financial sector crisis and to sharply increased budget deficits and worsened debt indicators and triggered the sovereign debt crisis. Core countries, in particular Germany, maintained a competitive edge through wage restraint allowing them to increase exports to periphery countries, while their banks profited from increased lending to non-core countries. In sum, the euro exacerbated intra-European imbalances whose unsustainability became evident in the aftermath of the global financial crisis and triggered the current sovereign debt crisis.

Access to Finance --- Adoption of Euro --- Banks & Banking Reform --- Currencies and Exchange Rates --- Debt Markets --- Emerging Markets --- Financial integration --- Global financial crisis --- Macroeconomics and Economic Growth --- Real estate bubble --- Sovereign debt crisis in Europe