IDEAS home Printed from https://ideas.repec.org/a/spr/weltar/v146y2010i4p781-797.html
   My bibliography  Save this article

The value of institutions for financial markets: evidence from emerging markets

Author

Listed:
  • Bernardin Akitoby
  • Thomas Stratmann

Abstract

This paper investigates the value of political institutions for financial markets, using panel data from emerging market countries. We test the hypothesis that changes in political institutions, such as improvements in democratic rights and increased government accountability, have a direct effect on sovereign interest rate spreads. We find that financial markets value institutions over and above the economic and fiscal outcomes these institutions shape. Democracy and accountability generally lower sovereign spreads, political risk tends to increase them, and financial markets tend to view election years negatively.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Bernardin Akitoby & Thomas Stratmann, 2010. "The value of institutions for financial markets: evidence from emerging markets," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 146(4), pages 781-797, December.
    • Handle: RePEc:spr:weltar:v:146:y:2010:i:4:p:781-797
    DOI: 10.1007/s10290-010-0073-7
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1007/s10290-010-0073-7
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1007/s10290-010-0073-7?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Eichengreen, Barry & Mody, Ashoka, 2000. "Lending booms, reserves and the sustainability of short-term debt: inferences from the pricing of syndicated bank loans," Journal of Development Economics, Elsevier, vol. 63(1), pages 5-44, October.
    2. Gelos, R. Gaston & Sahay, Ratna & Sandleris, Guido, 2011. "Sovereign borrowing by developing countries: What determines market access?," Journal of International Economics, Elsevier, vol. 83(2), pages 243-254, March.
    3. Carmen M. Reinhart & Kenneth S. Rogoff & Miguel A. Savastano, 2003. "Debt Intolerance," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 34(1), pages 1-74.
    4. Fatas, Antonio & Mihov, Ilian, 2001. "Government size and automatic stabilizers: international and intranational evidence," Journal of International Economics, Elsevier, vol. 55(1), pages 3-28, October.
    5. Keefer, Philip, 2001. "When do special interests run rampant ? disentangling the role in banking crises of elections, incomplete information, and checks and balances," Policy Research Working Paper Series 2543, The World Bank.
    6. Carlos Mulas-Granados, 2003. "The Political and Economic Determinants of Budgetary Consolidation in Europe," European Political Economy Review, European Political Economy Infrastructure Consortium, vol. 1(Spring), pages 15-39.
    7. Antonio Fatás & Ilian Mihov, 2003. "The Case for Restricting Fiscal Policy Discretion," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 118(4), pages 1419-1447.
    8. Torsten Persson & Guido Tabellini, "undated". "Political Institutions and Policy Outcomes: What are the Stylized Facts?," Working Papers 189, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    9. Alberto Alesina & Silvia Ardagna & Roberto Perotti & Fabio Schiantarelli, 2002. "Fiscal Policy, Profits, and Investment," American Economic Review, American Economic Association, vol. 92(3), pages 571-589, June.
    10. Philippe Aghion, 2005. "Growth and Institutions," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 32(1), pages 3-18, March.
    11. Block, Steven A. & Vaaler, Paul M., 2004. "The price of democracy: sovereign risk ratings, bond spreads and political business cycles in developing countries," Journal of International Money and Finance, Elsevier, vol. 23(6), pages 917-946, October.
    12. Sebastian Edwards, 1983. "LDC's Foreign Borrowing and Default Risk: An Empirical Investigation," NBER Working Papers 1172, National Bureau of Economic Research, Inc.
    13. Bayoumi, Tamim & Goldstein, Morris & Woglom, Geoffrey, 1995. "Do Credit Markets Discipline Sovereign Borrowers? Evidence from the U.S. States," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(4), pages 1046-1059, November.
    14. Persson, Torsten & Tabellini, Guido, 1999. "The size and scope of government:: Comparative politics with rational politicians," European Economic Review, Elsevier, vol. 43(4-6), pages 699-735, April.
    15. Hong G. Min, 1998. "Determinants of emerging market bond spread : do economic fundamentals matter?," Policy Research Working Paper Series 1899, The World Bank.
    16. Edwards, Sebastian, 1986. "The pricing of bonds and bank loans in international markets : An empirical analysis of developing countries' foreign borrowing," European Economic Review, Elsevier, vol. 30(3), pages 565-589, June.
    17. Aisen, Ari & Veiga, Francisco Jose, 2006. "Does Political Instability Lead to Higher Inflation? A Panel Data Analysis," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(5), pages 1379-1389, August.
    18. Manasse, Paolo & Roubini, Nouriel, 2009. ""Rules of thumb" for sovereign debt crises," Journal of International Economics, Elsevier, vol. 78(2), pages 192-205, July.
    19. Kaminsky, Graciela L. & Reinhart, Carmen M., 2000. "On crises, contagion, and confusion," Journal of International Economics, Elsevier, vol. 51(1), pages 145-168, June.
    20. Acemoglu, Daron & Johnson, Simon & Robinson, James A., 2005. "Institutions as a Fundamental Cause of Long-Run Growth," Handbook of Economic Growth, in: Philippe Aghion & Steven Durlauf (ed.), Handbook of Economic Growth, edition 1, volume 1, chapter 6, pages 385-472, Elsevier.
    21. Philip Keefer, 2002. "Politics and the Determinants of Banking Crises: The Effects of Political Checks and Balances," Central Banking, Analysis, and Economic Policies Book Series, in: Leonardo Hernández & Klaus Schmidt-Hebbel & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Se (ed.),Banking, Financial Integration, and International Crises, edition 1, volume 3, chapter 3, pages 085-112, Central Bank of Chile.
    22. Edwards, Sebastian, 1994. "The Political Economy of Inflation and Stabilization in Developing Countries," Economic Development and Cultural Change, University of Chicago Press, vol. 42(2), pages 235-266, January.
    23. W. J. Henisz, 2000. "The Institutional Environment for Economic Growth," Economics and Politics, Wiley Blackwell, vol. 12(1), pages 1-31, March.
    24. Alberto Alesina & Roberto Perotti, 1997. "Fiscal Adjustments in OECD Countries: Composition and Macroeconomic Effects," IMF Staff Papers, Palgrave Macmillan, vol. 44(2), pages 210-248, June.
    25. Nils Herger & Roland Hodler & Michael Lobsiger, 2008. "What Determines Financial Development? Culture, Institutions or Trade," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 144(3), pages 558-587, October.
    26. Bernardin Akitoby & Thomas Stratmann, 2008. "Fiscal Policy and Financial Markets," Economic Journal, Royal Economic Society, vol. 118(533), pages 1971-1985, November.
    27. Daron Acemoglu & Simon Johnson, 2005. "Unbundling Institutions," Journal of Political Economy, University of Chicago Press, vol. 113(5), pages 949-995, October.
    28. Olivier Blanchard & Roberto Perotti, 2002. "An Empirical Characterization of the Dynamic Effects of Changes in Government Spending and Taxes on Output," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 117(4), pages 1329-1368.
    29. von Hagen, Jurgen & Strauch, Rolf R, 2001. "Fiscal Consolidations: Quality, Economic Conditions, and Success," Public Choice, Springer, vol. 109(3-4), pages 327-346, December.
    30. North, Douglass C. & Weingast, Barry R., 1989. "Constitutions and Commitment: The Evolution of Institutions Governing Public Choice in Seventeenth-Century England," The Journal of Economic History, Cambridge University Press, vol. 49(4), pages 803-832, December.
    31. Alesina, Alberto & Wacziarg, Romain, 1998. "Openness, country size and government," Journal of Public Economics, Elsevier, vol. 69(3), pages 305-321, September.
    32. Paolo Mauro, 1995. "Corruption and Growth," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 110(3), pages 681-712.
    33. Keefer, Philip, 2004. "A review of the political economy of governance : from property rights to voice," Policy Research Working Paper Series 3315, The World Bank.
    34. repec:hrv:faseco:3353756 is not listed on IDEAS
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Sandile Hlatshwayo & Anne Oeking & Mr. Manuk Ghazanchyan & David Corvino & Ananya Shukla & Mr. Lamin Y Leigh, 2018. "The Measurement and Macro-Relevance of Corruption: A Big Data Approach," IMF Working Papers 2018/195, International Monetary Fund.
    2. Hartwell, Christopher A., 2014. "The impact of institutional volatility on financial volatility in transition economies: a GARCH family approach," BOFIT Discussion Papers 6/2014, Bank of Finland Institute for Emerging Economies (BOFIT).
    3. Jean-Louis Combes & Alexandru Minea & Pegdéwendé Nestor Sawadogo, 2019. "Does the composition of government expenditures matter for sovereign bond spreads' evolution in developing countries?," Working Papers halshs-02019063, HAL.
    4. Hartwell, Christopher A., 2014. "The impact of institutional volatility on financial volatility in transition economies : a GARCH family approach," BOFIT Discussion Papers 6/2014, Bank of Finland, Institute for Economies in Transition.
    5. Muhammad Asif Khan & Hossam Haddad & Mahmoud Odeh & Ahsanuddin Haider & Mohammed Arshad Khan, 2022. "Institutions, Culture, or Interaction: What Determines the Financial Market Development in Emerging Markets?," Sustainability, MDPI, vol. 14(23), pages 1-23, November.
    6. Patrick Carvalho, 2016. "Banking on Democracy: Financial Markets and Elections in Emerging Countries , by Javier Santiso ( MIT Press , Cambridge, MA , 2013 ), pp. xxxi + 317 ," The Economic Record, The Economic Society of Australia, vol. 92(297), pages 320-322, June.
    7. Kim, Heeho, 2011. "The risk adjusted uncovered equity parity," Journal of International Money and Finance, Elsevier, vol. 30(7), pages 1491-1505.
    8. Sottile, Pedro, 2013. "On the political determinants of sovereign risk: Evidence from a Markov-switching vector autoregressive model for Argentina," Emerging Markets Review, Elsevier, vol. 15(C), pages 160-185.
    9. Mariusz Jarmuzek & Mr. Tonny Lybek, 2018. "Can Good Governance Lower Financial Intermediation Costs?," IMF Working Papers 2018/279, International Monetary Fund.
    10. Christopher Hartwell, 2015. "Après le déluge: Institutions, the Global Financial Crisis, and Bank Profitability in Transition," Open Economies Review, Springer, vol. 26(3), pages 497-524, July.
    11. Eichler, Stefan & Plaga, Timo, 2020. "The economic record of the government and sovereign bond and stock returns around national elections," Journal of Banking & Finance, Elsevier, vol. 118(C).
    12. repec:zbw:bofitp:2014_006 is not listed on IDEAS
    13. Kim, Heeho & Cho, Seong-Hoon & Kim, Yongku, 2015. "Home bias, risk differential, and cultural spatial spillover effects," Journal of International Money and Finance, Elsevier, vol. 51(C), pages 114-136.
    14. Hartwell, Christopher A., 2018. "The impact of institutional volatility on financial volatility in transition economies," Journal of Comparative Economics, Elsevier, vol. 46(2), pages 598-615.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Bernardin Akitoby & Thomas Stratmann, 2008. "Fiscal Policy and Financial Markets," Economic Journal, Royal Economic Society, vol. 118(533), pages 1971-1985, November.
    2. Mr. Aleksandar Zaklan & Mr. Paolo Mauro & Martín Minnoni & Mr. Andre Faria, 2006. "The External Financing of Emerging Market Countries: Evidence from Two Waves of Financial Globalization," IMF Working Papers 2006/205, International Monetary Fund.
    3. Jean-Louis Combes & Alexandru Minea & Pegdéwendé Nestor Sawadogo, 2019. "Does the composition of government expenditures matter for sovereign bond spreads' evolution in developing countries?," Working Papers halshs-02019063, HAL.
    4. Haggard, Stephan & Tiede, Lydia, 2011. "The Rule of Law and Economic Growth: Where are We?," World Development, Elsevier, vol. 39(5), pages 673-685, May.
    5. Bruno Albuquerque, 2012. "Fiscal institutions and public spending volatility in Europe," Economic Bulletin and Financial Stability Report Articles and Banco de Portugal Economic Studies, Banco de Portugal, Economics and Research Department.
    6. Konstantinos Angelopoulos & George Economides, 2008. "Fiscal policy, rent seeking, and growth under electoral uncertainty: theory and evidence from the OECD," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 41(4), pages 1375-1405, November.
    7. Eicher, Theo S. & García-Peñalosa, Cecilia & Kuenzel, David J., 2018. "Constitutional rules as determinants of social infrastructure," Journal of Macroeconomics, Elsevier, vol. 57(C), pages 182-209.
    8. Paweł Borys & Piotr Ciżkowicz & Andrzej Rzońca, 2014. "Panel Data Evidence on the Effects of Fiscal Policy Shocks in the EU New Member States," Fiscal Studies, Institute for Fiscal Studies, vol. 35, pages 189-224, June.
    9. Combes, Jean-Louis & Minea, Alexandru & Sawadogo, Pegdéwendé Nestor, 2021. "Does the composition of government spending matter for government bond spreads?," Economic Modelling, Elsevier, vol. 96(C), pages 409-420.
    10. Luca Agnello & Ricardo M. Sousa, 2014. "The Determinants of the Volatility of Fiscal Policy Discretion," Fiscal Studies, Institute for Fiscal Studies, vol. 35, pages 91-115, March.
    11. Christoph Trebesch & Mr. Michael G. Papaioannou & Mr. Udaibir S Das, 2012. "Sovereign Debt Restructurings 1950-2010: Literature Survey, Data, and Stylized Facts," IMF Working Papers 2012/203, International Monetary Fund.
    12. Fatas, Antonio & Mihov, Ilian, 2006. "The macroeconomic effects of fiscal rules in the US states," Journal of Public Economics, Elsevier, vol. 90(1-2), pages 101-117, January.
    13. Nuno Torres & Óscar Afonso & Isabel Soares, 2010. "The connection between oil and economic growth revisited," FEP Working Papers 377, Universidade do Porto, Faculdade de Economia do Porto.
    14. Axel Dreher & Pierre-Guillaume Méon & Friedrich Schneider, 2014. "The devil is in the shadow. Do institutions affect income and productivity or only official income and official productivity?," Public Choice, Springer, vol. 158(1), pages 121-141, January.
    15. Jean-Marc Fournier & Manuel Bétin, 2018. "Sovereign defaults: Evidence on the importance of government effectiveness," OECD Economics Department Working Papers 1494, OECD Publishing.
    16. Ms. Ana L Fostel & Sandeep Kapur & Mr. Luis Catão, 2007. "Persistent Gaps, Volatility Types, and Default Traps," IMF Working Papers 2007/148, International Monetary Fund.
    17. Méon, Pierre-Guillaume & Sekkat, Khalid, 2022. "A time to throw stones, a time to reap: how long does it take for democratic transitions to improve institutional outcomes?," Journal of Institutional Economics, Cambridge University Press, vol. 18(3), pages 429-443, June.
    18. Baland, Jean-Marie & Moene, Karl Ove & Robinson, James A., 2010. "Governance and Development," Handbook of Development Economics, in: Dani Rodrik & Mark Rosenzweig (ed.), Handbook of Development Economics, edition 1, volume 5, chapter 0, pages 4597-4656, Elsevier.
    19. Hall, Stephen G & Ahmad, Mahyudin, 2013. "Can Trust Explain Social Capital Effect on Property Rights and Growth?," MPRA Paper 48440, University Library of Munich, Germany.
    20. Sebastián Nieto-Parra, 2009. "Who Saw Sovereign Debt Crises Coming?," Economía Journal, The Latin American and Caribbean Economic Association - LACEA, vol. 0(Fall 2009), pages 125-169, August.

    More about this item

    Keywords

    Fiscal policy; Sovereign risk; Spreads; Institutions; Emerging markets; E62; G15; H39; H63;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • H39 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Other
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:spr:weltar:v:146:y:2010:i:4:p:781-797. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.