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Andrew K. Rose Berkeley-Haas, CEPR and NBER

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Comments on Forbes, Fratzscher , Kostka and Straub “ Bubble Thy Neighbor : Portfolio Effects …” . Andrew K. Rose Berkeley-Haas, CEPR and NBER. Key Message. Brazil’s bond taxes lower: Brazilian bond holding

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comments on forbes fratzscher kostka and straub bubble thy neighbor portfolio effects

Comments on Forbes, Fratzscher, Kostka and Straub “Bubble Thy Neighbor: Portfolio Effects …”

Andrew K. Rose

Berkeley-Haas, CEPR and NBER

key message
Key Message
  • Brazil’s bond taxes lower:
    • Brazilian bond holding
    • Equity holdings in “control risk” countries (Colombia, Indonesia, Peru, Thailand ….)
  • Focus in this paper: cross-country
  • Also interesting: cross-asset
    • Brazilian bond taxes lowers Brazilian equity holdings more than Brazilian bonds! (Table 6)
the good
The Good
  • Good Question
    • Interesting, original, topical, important
  • New Data Set
  • Choice of Brazil
    • Good tax variation
    • Important country, possibility of spillovers
  • Very Careful, Thorough Work
    • Frustratingly so (for discussant)
    • Nice Quantitative Summary of Effects
    • Most Caveats included
not as good
Not as Good
  • How scalable is the finding?
  • Interview evidence from equity investors makes it look like taxes should be irrelevant (makes one suspicious of a fishing expedition)
    • Ex: is three months optimal?
    • Ex: why use change in IOF for just bonds?
  • Little motivation for externalities from interviews
  • Is stronger coverage of equity (4x bonds) the reason for findings?
    • Data coverage, not true effect?
    • Some (mild) over-statement
    • But most results shown, warts and all; authors very aware of sensitivities
nit picking
Nit-Picking?
  • If Brazil weight falls, then something else must rise (possibly cash)
  • Odd that effects of IOF are:
    • 16.6%-19.7% for global equity funds
    • Only 3.1%-4.8% for global emerging market equity
    • Only 0.1-2.1% for Latin American regional equity
    • Only 5-5.1% for Global emerging market bonds
  • Would have expected opposite!
most externality estimates small
Most Externality Estimates Small
  • Ex: discussion (p19) of Table 4 (key!) “This indicates that there are no significant externalities from changes in the IOF on average portfolio allocations to all other countries in the sample.”
bubble thy neighbor
Bubble thy Neighbor?
  • Where’s the evidence of bubbles?
  • If pecuniary externality with complete markets, effects offset each other; Pareto efficiency
    • Reasonable in financial markets?
  • “Bubble” a loaded word
a worry low effect of benchmark
A Worry: Low Effect of Benchmark
  • Looks like 1:1 effect in Figure 1
  • Very far from 1 in empirics (β≈.7)
    • Why so low? Measurement Error? Something that requires IV?
    • First “Iron Law” of Econometrics: coefficients biased down
  • Why not impose coefficient of 1 on benchmark?
referee questions points
Referee Questions/Points
  • Why start in 2006, not earlier?
  • Trade Diversion analogy a red herring
    • Trade diversion with discriminatory taxes, differential prices (RTAs are not multilateral)
    • Irrelevant here!
  • Box-Cox test for levels vs. logs
  • If errors iid in (1), should be MA(1) in (2)
    • More generally: test for dynamics?
    • Especially with transitory taxes?
  • Is (3) necessary?
    • Usually don’t care about covariances between regressors
  • Descriptive statistics in Table 3 would help
my take believable on brazil
My Take: Believable … on Brazil
  • Evidence of Externalities Weak
    • Most direct evidence is negative: why so little effect on bonds?
    • Little in Tables 4-6
    • Relatively little evidence on equities too
  • Appeal to Signaling Story (Bartolini-Drazen)
    • But no direct evidence of signaling
    • Just a consistent interpretation
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