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

  • 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