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ItemEssays on integration vs. segmentation of financial markets(Georgia Institute of Technology, 2018-05-21) Zhang, TengEssay I: Uniform Mortgage Regulation and Distortion in Capital Allocation The U.S. economy is significantly influenced by local features, but most federal policies are national. In this essay, I study the unintended consequences of the uniformity of the national conforming loan limit (CLL) before 2008 on bank lending in local jumbo mortgage markets. When the national CLL increased, the jumbo share of residential mortgage markets in low-income counties was significantly reduced relative to high-income counties. I find that banks responded to the exogenous national shock by significantly increasing jumbo approval rates in low-income counties. The economic magnitude is large: a county with a \$10,000 lower median income is associated with, on average, a 6 percentage-point (or 11.77\%) higher jumbo loan approval rate compared to a county with a \$10,000 higher median income. The results are not driven by credit supply changes, borrower quality changes, home price anticipation, or the demand channel. Consistent with the competition mechanism in which lenders expand jumbo credit to defend market share, I also find that banks in low-income counties lower jumbo mortgage rates and later suffer from worse mortgage performance. Furthermore, smaller and less informed banks expand jumbo credit more aggressively, and, as a result, riskier borrowers receive more credit. Overall, my results highlight negative consequences of the uniformity of federal policy in mortgage markets by showing how it can lead to distorted bank lending and reduce efficiency of credit allocation across regions. Essay II: Housing Market Integration and Economic Convergence In this essay, I find that the increasing housing market integration in recent decades has contributed significantly to the convergence of output, income, and total employment growth across U.S. states. States with integrated housing markets also converge in their utilization of the home equity line of credit and in the prevalence of real-estate secured loans, which suggests the collateral channel as a key transmission mechanism through which housing market integration contributes to the economic convergence. To establish causality, I identify exogenous variations in state-level house prices using real estate related foreign direct investments that are orthogonal to state economic conditions. My findings are robust to controls for banking integration and geographic proximity, and are not driven by the performance of the real estate industry or changes in local demand. I also obtain similar results at the MSA level. Essay III: Global Diversification with Local Stocks: A Road Less Traveled In this essay, I document a great heterogeneity in the degree of global financial integration at the firm-level and delve into its implications for international portfolio diversification. Specifically, I estimate the degree of integration for about 14,000 sample firms per year, on average, from major developed markets over the period 1995-2014, using the R-square method. The key findings are: (i) The R-square, our measure of integration, is very widely distributed across sample firms, within and across countries; (ii) The firm-level integration is significantly affected by the three attributes tested – country, industry, and style; style exerts the greatest effect, followed by country and industry; (iii) `Local' stocks that are least driven by the common global factors are significantly more effective in portfolio risk diversification than either domestic or `global' stocks; this result holds during the recent global financial crises; (iv) Systematically identifying local stocks and holding them optimally, investors can significantly benefit from the enhanced the mean-variance efficiency within the familiar confines of developed markets. In light of the stark heterogeneity in global integration at the granular level, inferences of the diversification gains solely from stock market indices, the usual practice, are likely to understate the potential gains that world stock markets can provide.
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ItemEssays in international capital markets(Georgia Institute of Technology, 2011-11-14) Lee, KyuseokMy dissertation consists of three essays in international capital markets. In Chapter I, we examine the herd trading behavior of institutional investors trading around the world. Using a new transaction-level trades database of 531 U.S. institutional investors trading across 37 countries for the period 2002-2009, we find robust evidence of intra- and inter-period herdings at the monthly frequency. We find no evidence that trades by institutions in our sample destabilize local stock markets. Further analysis shows that: (i) in the buy side, both intra- and inter-period herdings are more pronounced in countries with weaker information environments; and (ii) in the sell side, intra-period herding is more pronounced in countries with stronger information environments, whereas inter-period herding is not significantly related to information environments. In Chapter II, we document that the degree of co-movement between bilateral USD ex- change rates has increased substantially since the introduction of the euro in 1999 and investigate what drives the increased co-movement. For each of our 33 sampled bilateral USD exchange rates, we measure the degree of co-movement using the R-square from re- gressing weekly exchange rate changes on the weekly world exchange rate factor. Our results show that, for the majority of sample exchange rates, the R-square has increased substan- tially over the period 1999-2010. Specifically, the average R-square was 0.15 in 1999, but it increased to 0.47 by more than 200% in 2010. Further analysis reveals that the rising influence of the euro relative to USD over a third currency can explain most of the increase in the measured co-movement over time. In Chapter III, we examine the level and trend of U.S. domestic market integration. For each of our sample states, we construct the state (market) portfolio comprising public firms headquartered within the state and compute R-square, our measure of integration, from regressing state portfolio returns on national stock market factors. Using weekly returns, we estimate the regression for each year of our sample period 1963-2008. The key findings are: (i) For the majority of sample states, the R-square exhibits a statistically significant upward trend, implying that U.S. domestic stock markets were not fully integrated and have been integrating during the sample period; (ii) consistent with the previous result, the explanatory power of the state factor over individual stock returns has been decreasing for the majority of states; and (iii) the increasing integration of U.S. domestic stock markets is associated with the decreasing home state bias, suggesting that investors' pursuit of nation- wide investment opportunities may be a significant driver of domestic financial integration.