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An Information-based Trade Off Between Foreign Direct Investment and Foreign Portfolio Investment
The paper develops a model of foreign direct investments (FDI) and foreign portfolio investments. FDI is characterized by hands-on management style which enables the owner to obtain relatively refined information about the productivity of the firm. This superiority, relative to portfolio investments, comes with a cost: A firm owned by the relatively well-informed FDI investor has a low resale price because of a lemons' type asymmetric information between the owner and potential buyers. Consequently, investors, who have a higher (lower) probability of getting a liquidity shock that forces them to sell early, will invest in portfolio (direct) investments. This result can explain the greater volatility of portfolio investments relative to direct investments. Motivated by empirical evidence, we show that this pattern may be weaker in developed economies that have higher levels of transparency in the capital market and better corporate governance. We also study welfare implications of the model.
Three Branches of Theories of Financial Crises
In this monograph, we review three branches of theoretical literature on financial crises. The first deals with banking crises originating from coordination failures among bank creditors. The second deals with frictions in credit and interbank markets due to problems of moral hazard and adverse selection. The third deals with currency crises. We discuss the evolutions of these branches in the literature, and how they have been integrated recently to explain the turmoil in the world economy during the East Asian crises and in the last few years. We discuss the relation of the models to the empirical evidence and their ability to guide policies to avoid or mitigate future crises.
An Information-based Trade Off Between Foreign Direct Investment and Foreign Portfolio Investment
The paper develops a model of foreign direct investments (FDI) and foreign portfolio investments (FPI). The model describes an information-based trade off between direct investments and portfolio investments. Direct investors are more informed about the fundamentals of their projects. This information enables them to manage their projects more efficiently. However, it also creates an asymmetric-information problem in case they need to sell their projects prematurely, and reduces the price they can get in that case. As a result, investors, who know they are more likely to get a liquidity shock that forces them to sell early, are more likely to choose portfolio investments, whereas investors, ...
Financial Fragility in the COVID-19 Crisis
In the decade following the financial crisis of 2008, investment funds in corporate bond markets became prominent market players and generated concerns of financial fragility. The COVID-19 crisis provides an opportunity to inspect their resilience in a major stress event. Using daily microdata, we document major outflows in these funds during this period, far greater than anything they experienced in past events. Large outflows were sustained over several weeks and were widespread across funds. Inspecting the role of sources of fragility, we show that both the illiquidity of fund assets and the vulnerability to fire sales were important factors in explaining outflows in this episode. The exposure to sectors most hurt by the COVID-19 crisis was also important. Two policy announcements by the Federal Reserve about extraordinary direct interventions in corporate-bond markets seem to have played an important role in calming down the panic and reversing the outflows.
