How Financial Innovations in Developed Markets Affect Emerging Markets?——A Collateral Equilibrium Approach
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| Title | How Financial Innovations in Developed Markets Affect Emerging Markets?——A Collateral Equilibrium Approach
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| Author | Wang Yongqin and Du Julan |
| Organization | Fudan University; The Chinese University of Hong Kong |
| Email | yongqinwang@fudan.edu.cn;julandu@cuhk.edu.hk |
| Key Words | Financial innovation, bubbles, growth, financial integration |
| Abstract | The rise of securitization markets and shadow banking has changed the international financial landscape, yet has been little explored by scholars. Using a collateral equilibrium framework, this paper studies how financial innovations in developed markets (DMs) affects asset prices and growth in emerging markets (EMs). The paper finds that in DMs, financial innovations under financial integration can increase asset prices and output. In EMs, when the financial development gap is small, financial integration can increase asset prices and output. When the financial development gap is large, financial integration decreases asset prices and output. When financial innovations in DMs progresses from a leverage economy to tranche economy and then to a CDS economy, financial integration will decrease EM asset prices and output levels gradually. This research can shed light on China’s financial innovations and financial opening, as China’s financial development has followed the leverage economy tranche economy CDS economy path. |
| Serial Number | WP1251 |
| Time | 2018-01-04 |
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