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International Finance - MG760-144 Week12 - Chapter 18 Nazifa Antara Prome Homework Assignment Monroe College King Graduate School
International Finance - MG760-144 Week12 - Chapter 18 Nazifa Antara Prome Homework Assignment Monroe College King Graduate School
International Finance - MG760-144 Week12 - Chapter 18 Nazifa Antara Prome Homework Assignment Monroe College King Graduate School
Spillover Effect
Spillover effect refers to the impact that seemingly unrelated events in one nation can have on the
economies of other nations. Although there are positive spillover effects, the term is most commonly
applied to the negative impact a domestic event has on other parts of the world. For example, if consumer
spending in the United States declines, it has spillover effects on the economies that depend on the U.S. as
their largest export market. The larger an economy is, the more spillover effects it is likely to produce
Spillover effects are a type of network effect that has become more common as globalization deepens the
financial connections between economies. The Canada-U.S. trade relationship provides an example of
spillover effects. This is because the U.S. is Canadas main market by a wide margin across nearly every
export-oriented sector. The effects of a minor U.S. slowdown are amplified by the Canadian reliance on
Since the 2009 China has also emerged as a major source of spillover effects. This is because Chinese
manufacturers have driven much of the global commodity demand growth since 2000. With China
becoming the number two economy in the world after the U.S., the number of countries that experience
spillover effects from a Chinese slowdown is significant. China slowing down has a palpable impact on
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worldwide trade in metals, energy, grains, and many more commodities. This leads to economic pain
through much of the world, although it is most acute in Eastern Europe, the Middle East and Africa as
There are some countries that experience very little as far as spillover effects from the global market.
These closed off economies are getting rarer as even North Korea - an economy nearly sealed off from the
world trade - feels spillover effects from the Chinese slowdown. A few developed economies are sway to
economic phenomenon that can overwhelm spillover effects. Japan, the U.S. and the Eurozone, for
example, experience spillover effects from China but this impact is partially counteracted the flight to
safety by investors when global markets get shaky. Similarly, if one of the economies in this safe haven
group is struggling, investment will usually go to one of the remaining safe havens. This effect was seen
with the U.S. investment inflows during the EUs struggles with the Greek debt crisis. When dollars flow
into U.S. Treasuries, the yield goes down and the borrowing cost for American home buyers, borrowers
and businesses. This is an example of a positive spillover effect from the perspective of a U.S. consumer.
2. In what sense do firms with nontradable assets get a free-ride from firms whose securities are
internationally tradable?
Answer:
Due to the spillover effect, firms with nontradable securities can benefit in terms of higher security prices
and lower cost of capital, without in curring any costs associated with making the securities
Answer:
The pricing-to-market (PTM) refers to the phenomenon that the same securities are priced differently for
different investors. A well-known example of PTM is provided by Nestle. Up until 1988 November,
foreigners were only allowed to hold Nestle bearer shares; only Swiss residents were allowed to hold
registered shares.
4. Explain how the premium and discount are determined when assets are priced-to-market. When
would the law of one price prevail in international capital markets even if foreign equity
Answer:
(ii) foreigners ability to mitigate the effect of these restrictions using their own domestic securities.
In a special case where foreigners can exactly replicate the securities under restriction, then PTM will
cease to apply.
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References
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