Determinants of Stock Market Correlations. Accounting for Model Uncertainty and Reverse Causality in a Large Panel Setting
with A Afonzo and K Beck
We examine 22 determinants of stock market correlations in a panel setting with 651 country pairs of developed economies over the 2001-2018 period, while accounting for model uncertainty and reverse causality. On the one hand, we find, that a number of determinants, well established in the literature, e.g. trade, institutional distance, and exchange rate volatility fail the robustness test. On the other hand, we find strong evidence supporting several others: (1) inertia, with current correlation being the best single predictor of the future stock market correlation (2) positive impact of the market size (3) imperative role of the interconnected financial factors: capital mobility, financial development, and portfolio equity flows. With the expected future growth of economies and their capital markets as well as deepening financial liberalization, this paper brings strong support to the hypothesis of diminishing international diversification potential.
Chinese investment in Greece: Analysing the response to a crisis
with J Li and S Masino
This paper examines one of the most high-profile Chinese investment projects in Europe. Using data collected over the period 2019-2021, we tackle important questions around the impact on employment and workplace regimes on the state-run Piraeus Port Authority (PPA) and COSCO-run Piraeus Container Terminal (PCT) sides of Piraeus port in Greece. Our key findings indicate that, while COSCO’s investment has created much-needed local employment, the adoption of widespread subcontracting of the labour force has segmented workers into very different workplace regimes depending on the side of the port they work at. We found the new workplace regime introduced by PCT to have evolved over time since the inception of operations, but to have nevertheless retained key elements of a labour control strategy detrimental to workers’ agency, that extends to the control of workers’ unionisation. Importantly, we examine the facilitative and enabling role that the national labour market reforms played in paving the way for COSCO’s adoption and deployment of such working practices. Overall, this case study highlights a number of important issues for national and EU-wide policy making and the operation of the FDI screening mechanism.
Risky business: Political stability along the Belt and Road
with O Shepotylo
This paper explores the impact of improvements in the political environment on trade and welfare. We conduct a counterfactual analysis using a structural gravity approach, to investigate how the Belt and Road Initiative (BRI) combined with more assertive and active Chinese foreign policy would impact on global trade flows and global welfare. In our model, the BRI benefits come from reduced trade costs, reduced bilateral political uncertainty, military alliances, and greater political stability in BRI countries. Based on our full general equilibrium results, our key findings are that (i) military alliances between BRI countries and China are expected to have the most positive effect on welfare, with particularly positive effects on China and South Asia (ii) improved political stability across BRI countries is expected to have the most beneficial impact on South Asia. These results suggest that it is important to look beyond economic gains derived from trade cost reductions; politically aligning countries participating in the BRI and providing security to the countries where China invests in transport and infrastructure has the potential to deliver significant benefits.
Financial, institutional, and macroeconomic determinants of cross-country portfolio capital flows
with A Afonzo, J Alves and K Beck
We consider a new dataset that provides a description of the population of financial equity flows between developed countries from 2001 to 2018. We follow the standard practice of controlling for pull and push factors as well as gravity-style variables, while also accounting for the business cycle, public debt and sovereign ratings. Our key findings are as follows: (i) equity flows are more intense between countries at the same stage of the business cycle (ii) increased equity flows to countries with a relatively lower public debt deficit as a ratio of GDP (iii) financial and macroeconomic variables are mportant for big equity flows, while institutional variables are important for the small flows. Overall, this new dataset provides novel evidence on the importance of the business cycle, government debt and sovereign ratings scores.