Three Essays On International Financial Market Linkages PDF Download

Financial inter-dependencies are since the financial crisis at the forefront of macroeconomic research and policy making. The world had painfully learned how small and localized events can travel through the global financial system with huge repercussions for the real economy. Since then, many studies have analyzed the propagation properties of given financial exposure networks. Each day, however, large amounts of financial assets are traded and financial institutions' balance-sheets change in response to new information, regulation or monetary policy. Changes in exposures crucially affect the transmission of shocks. This thesis develops general equilibrium frameworks that show how financial networks emerge endogenously from trade in financial assets between heterogeneous institutions. I use micro and macro-level datasets including confidential data from the Banque de France to structurally identify risk-preferences, institutions' beliefs about the distribution of future financial asset returns, and the specific constraints that drive financial network formation. The thesis also derives an explicit firm-level link of financial networks to an economy's productive structure.Chapter 1 of the thesis shows how firm-level productivity shocks propagate through financial networks. If firms need external funds to finance capital expenditure, banks create linkages between them that go beyond their input-output relationships. These links can affect aggregate output. The chapter builds a multi-sector production model of heterogeneous firms that are financed by heterogeneous leverage targeting banks. Banks are themselves connected through bilateral cross-holdings. Endogenous financial asset prices introduce a new propagation channel of productivity shocks. Structural parameters such as bank-level leverage constraints determine the strength of this channel and one statistic is sufficient to capture it. I use confidential matched bank-firm-level data from the Banque de France on corporate bond investments to estimate the model. The model can be used to study macro-prudential regulation and monetary policy.Chapter 2 uses bank- and instrument-level data on asset holdings and liabilities to identify and estimate a general equilibrium model of trade in financial instruments shaping an endogenous network of interlinked banks' balance-sheets. Bilateral ties are formed as each bank selects the size and the diversification of its assets and liabilities. Shocks propagate due to the response, rather than the size, of bilateral ties to such shocks. The network exhibit key theoretical properties: (i) more connected networks lead to less amplification of partial equilibrium shocks, (ii) the influence of a bank's equity is independent of the size of its holdings; (iii) more risk-averse banks are more diversified, lowering their own volatility but increasing their influence on other banks. The structural estimation of the network model for the universe of French banks shows that the endogenous change in the network matters two to three times more than the initial network of cross-holdings for the transmission of shocks. The estimated network is used to assess the effects of the ECB's quantitative easing policy.Chapter 3 concludes the thesis with a more aggregated sector-level analysis. It first studies how the sharp deterioration of the net external portfolio position of France between 2008 and 2014 was driven by sectoral patterns such as the banking sector retrenchment and the increase in foreign liabilities of the public and corporate sectors but was mitigated by the expansion of domestic and foreign asset portfolios of insurance companies. It provides a network representation of the links between domestic sectors and the rest of the world. Sectoral shock propagation through inter-sectoral security holdings is studied in an estimated balance-sheet contagion model.