Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. The Institute for the Study of Labor (IZA) in Bonn is a local and virtual international research center and a place of communication between science, politics and business. IZA is an independent nonprofit organization supported by Deutsche Post Foundation. The center is associated with the University of Bonn and offers a stimulating research environment through its international network, workshops and conferences, data service, project support, research visits and doctoral program. IZA engages in (i) original and internationally competitive research in all fields of labor economics, (ii) development of policy concepts, and (iii) dissemination of research results and concepts to the interested public. Terms of use: Documents in D I S C U S S I O N P A P E R S E R I E SIZA Discussion Papers often represent preliminary work and are circulated to encourage discussion. Citation of such a paper should account for its provisional character. A revised version may be available directly from the author. The financial crisis has re-ignited the fierce debate about the merits of financial globalization and its implications for growth, especially for developing countries. The empirical literature has not been able to conclusively establish the presumed growth benefits of financial integration. Indeed, a new literature proposes that the indirect benefits of financial integration may be more important than the traditional financing channel emphasized in previous analyses. A major complication, however, is that there seem to be certain "threshold" levels of financial and institutional development that an economy needs to attain before it can derive the indirect benefits and reduce the risks of financial openness. In this paper, we develop a unified empirical framework for characterizing such threshold conditions. We find that there are clearly identifiable thresholds in variables such as financial depth and institutional quality − the cost-benefit trade-off from financial openness improves significantly once these threshold conditions are satisfied. We also find that the thresholds are lower for foreign direct investment and portfolio equity liabilities compared to those for debt liabilities.JEL Classification: F3, F4, O4

SummaryOur objective was to study the need for regulating hedge funds, using existing regulatory approaches and our own models as a frame of reference. Our questions include: Should hedge funds remain unregulated? Should potential regulation of hedge funds fall within the present regulatory structure, or do we need new approaches to effectively regulate hedge funds, and if so what would those approaches be?Existing studies have highlighted the broad benefits that hedge funds can provide to the financial system in terms of diversification, competition and price discovery. Our models emphasise the extremely valuable role that hedge funds, as unregulated institutions, can play in alleviating liquidity problems. Suppose all financial institutions were regulated, and the economy suffers a significant shock leading to a liquidity crisis. In this case the regulated institutions may be prevented from engaging in essential trading activity for regulatory reasons, perversely exasperating the crisis. Unregulated financial institutions, such as hedge funds, are not so restricted and will see a benefit in trading, thus helping to contain the crisis.Despite these potential benefits of hedge fund activities, there are compelling reasons why some form of regulation of hedge funds is necessary. In particular, we would highlight that there is a real potential that the collapse of a large hedge fund may trigger a systemic crisis episode, carrying with it significant economic costs. Furthermore, whilst such a collapse may break the current impasse in the regulatory debate it is likely to lead to a knee-jerk reaction by the public and politicians, forcing the implementation of inefficient and overbearing regulations. By contrast we find arguments for regulating hedge funds directly for reasons of consumer protection unconvincing.Unfortunately, most discussion on the regulation of hedge funds proposes to fit hedge funds within the existing regulatory structure (disclosure and activity restrictions), and fails to address the unique nature of hedge funds. We argue that such regulations are inappropriate, and would either be ineffective or cause an irrevocable harm to the hedge fund industry, impeding their ability to deliver wider market benefits.The systemic risk from hedge funds stems from the aftermath of a large funds collapse, not the ongoing regular trading activities of solvent funds. Therefore regulations should aim at containing the fallout from any such default so as to minimise market disruption. At the same time, regulations should not hinder the benefits associated with funds regular operations.We suggest that this can most effectively be implemented by instituting a formal resolution process whereby the regulator, prime brokers, and client banks all have the legal obligation to ensure that the fund be unwound as quickly as possible. Clearly, such an organized resolution process must not be confused with a bailout, and no public funds must be used.2

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. The Institute for the Study of Labor (IZA) in Bonn is a local and virtual international research center and a place of communication between science, politics and business. IZA is an independent nonprofit organization supported by Deutsche Post Foundation. The center is associated with the University of Bonn and offers a stimulating research environment through its international network, workshops and conferences, data service, project support, research visits and doctoral program. IZA engages in (i) original and internationally competitive research in all fields of labor economics, (ii) development of policy concepts, and (iii) dissemination of research results and concepts to the interested public. Terms of use: Documents in D I S C U S S I O N P A P E R S E R I E SIZA Discussion Papers often represent preliminary work and are circulated to encourage discussion. Citation of such a paper should account for its provisional character. A revised version may be available directly from the author. The financial crisis has re-ignited the fierce debate about the merits of financial globalization and its implications for growth, especially for developing countries. The empirical literature has not been able to conclusively establish the presumed growth benefits of financial integration. Indeed, a new literature proposes that the indirect benefits of financial integration may be more important than the traditional financing channel emphasized in previous analyses. A major complication, however, is that there seem to be certain "threshold" levels of financial and institutional development that an economy needs to attain before it can derive the indirect benefits and reduce the risks of financial openness. In this paper, we develop a unified empirical framework for characterizing such threshold conditions. We find that there are clearly identifiable thresholds in variables such as financial depth and institutional quality − the cost-benefit trade-off from financial openness improves significantly once these threshold conditions are satisfied. We also find that the thresholds are lower for foreign direct investment and portfolio equity liabilities compared to those for debt liabilities.JEL Classification: F3, F4, O4

The financial crisis has re-ignited the fierce debate about the merits of financial globalization and its implications for growth, especially for developing countries. The empirical literature has not been able to conclusively establish the presumed growth benefits of financial integration. Indeed, a new literature proposes that the indirect benefits of financial integration may be more important than the traditional financing channel emphasized in previous analyses. A major complication, however, is that there seem to be certain "threshold" levels of financial and institutional development that an economy needs to attain before it can derive the indirect benefits and reduce the risks of financial openness. In this paper, we develop a unified empirical framework for characterizing such threshold conditions. We find that there are clearly identifiable thresholds in variables such as financial depth and institutional quality-the cost-benefit trade-off from financial openness improves significantly once these threshold conditions are satisfied. We also find that the thresholds are lower for foreign direct investment and portfolio equity liabilities compared to those for debt liabilities.