Q2. What are the important determinants of transaction flows?
Their results demonstrate that market size, openness, efficiency of transactions, and distance are the most important determinants of transaction flows.
Q3. What is the key element that is required to generate an equation of asset trade?
The two key elements that are required to generate such an equation are: 1) that assets are imperfect substitutes because they insure against different risks; 2) that cross-border asset trade entails some transaction or information costs.
Q4. What does the literature show about trade between country pairs?
Frankel and Rose (1998) show that trade between country pairs is positively related to the correlation of their business cycles; since trade decreases with distance, business cycle correlation does as well.
Q5. What is the common home market effect in the equations for trade in goods?
This is a common ‘home market effect’ in equations for trade in goods (large countries have high demand, more producers, produce to avoid transport costs, and export the surplus – see Feenstra, Markusen and Rose, 1998).
Q6. What is the meaning of the term ‘home bias’?
The authors use ‘home bias’ in a very general sense, referring to the evidence that residents of a given country invest much less abroad than portfolio allocation models would appear to suggest as optimal diversification.
Q7. What is the estimating equation for the mcapA?
To summarise, the estimating equation arising out of this analysis takes the following form:Log(TAB,t) = .1 log(mcapA,t) + .2 log(mcapB,t) + .3 log(distanceAB,t) + .4 information variables + .5 transaction technology variables + .6 cyclical variables + }AB,t10
Q8. What is the effect of introducing the financial centre dummies?
In fact, when the authors include explicit informational variables, as in the next sub-section, the authors discover that the coefficients on these financial centre dummies fall further in size and become very unstable (often taking negative signs) in individual annual cross-sections.
Q9. What is the alternative argument for a gravity model of equity trade?
An alternative argument for a gravity model of equity trade starts from the observed complementarity between trade and FDI flows.
Q10. How does the goodness of fit of the equation change?
The overall goodness of fit of this equation rises dramatically too: from the initial R2 = 0.36 (Table1) to R2 = 0.60 (recall the authors have over 1400 degrees of freedom, with 182 crosssection observations for each of eight years).