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Title:Banks in space: Does distance really affect cross-border banking? PDF Logo
Authors:Neugebauer, Katja
Issue Date:2011
Series/Report no.:IAW-Diskussionspapiere 70
Abstract:During the last years, gravity equations have leapt from the trade literature over into the literature on financial markets. Martin and Rey (2004) were the first to provide a theoretical model for cross-border asset trade, yielding a structural gravity equation that could be tested empirically. In this paper, I use a gravity model to evaluate factors that affect cross-border banking. Furthermore, I extend the baseline model to allow for third-country effects, which have been shown to atter for international trade, using spatial econometric techniques. I try to answer the following question: First, is there a spatial dimension in cross-border banking? Second, if so, has it changed over time, and third, what happens if this spatial dimension is ignored? I use bilateral data on cross-border banking assets for 15 countries over the time period 1995-2005, and I estimate cross-section regressions for each year. I find strong evidence for a spatial dimension in crossborder banking. Furthermore, the direct effect of distance decreases signficantly when applying spatial econometric techniques.
Subjects:Spatial econometrics
gravity equation
banking market integration
distance puzzle
JEL:E44
E32
G21
Document Type:Working Paper
Appears in Collections:IAW-Diskussionspapiere, Institut für Angewandte Wirtschaftsforschung (IAW)

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