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International Monetary Fund. Monetary and Capital Markets Department

Abstract

Published twice yearly, the Global Financial Stability Report (GFSR) was created to provide a more frequent assessment of global financial markets by the IMF and to address emerging market financing in a global context. It provides timely analysis of developments in both mature and emerging market countries and seeks to identify potential fault lines in the global financial system that could lead to crisis. The GFSR aims to deepen its readers’ understanding of global capital flows, which play a critical role as an engine of world economic growth. Of key value, the report focuses on current conditions in global financial markets, highlighting issues of financial imbalances, and of a structural nature, that could pose risks to financial market stability and sustained market access by emerging market borrowers.

International Monetary Fund. Monetary and Capital Markets Department

Abstract

Financial risks have increased and underlying conditions have worsened since the April 2007 Global Financial Stability Report (GFSR). The period ahead may be difficult, as bouts of turbulence are likely to recur and the adjustment process will take some time. Uncertainty about the final size of losses, and when and where they will be revealed, will likely continue to keep market sentiment and conditions unsettled in the near term. This chapter outlines a number of the causes and consequences of the recent episode of turmoil and offers some initial thoughts on possible responses that the private and public sectors might consider to help improve global financial resilience.

International Monetary Fund. Monetary and Capital Markets Department

Abstract

This chapter assesses how market risk management techniques may have contributed to the benign financial environment of recent years, and whether seemingly prudent behavior by individual firms, reacting to similar market risk systems, could serve to amplify market volatility in periods of stress beyond what would otherwise have occurred. Based on simulations and observed risk management practice, there are grounds for believing that this could be the case. Results of the simulations suggest that, in a period of stress, having a variety of risk models is more stabilizing than uniformity. Perhaps more important, however, is the presence of a variety of types of financial institutions with differing investment horizons and risk appetites, as well as the scope to take offsetting positions when prices overshoot and “fire sales” occur.

International Monetary Fund. Monetary and Capital Markets Department

Abstract

This chapter finds that—over the medium term—a more developed domestic financial market increases the volume and helps reduce the volatility of capital flows to emerging markets. Specifically, the estimation results find that, although growth is the primary determinant of the level of capital inflows, equity market liquidity and financial openness also help attract capital inflows. Moreover, financial openness is associated with lower capital inflow volatility. These results, which are consistent with the views expressed by institutional investors, point to the advantages of focusing on the medium-term goal of improving the quality of domestic financial markets. By adopting such a focus, emerging market countries will be in a better position to maximize the benefits of capital inflows while dealing with their potential volatility.