30 June 2016

Modelling the Cost of Financial Services

A new model for understanding international trade finance costs during periods of financial crisis.

Trade finance consists of borrowing using trade credit as collateral and/or the purchase of insurance against the possibility of trade credit defaults. According to some estimates more than 90% of trade transactions involve some form of credit, insurance, or guarantee, making trade finance extremely critical for smooth trades. After the global financial crisis of 2008-2009, the limited availability of international trade finance has emerged as a potential cause for the sharp decline in global trade. As a result, understanding how trade finance costs varied over the period in and around the financial crisis and across countries has become critical for policymakers to ensure adequate availability of trade finance during the crisis period and mitigate the severity of the crisis.

To study the variations in the costs of trade finance across multiple countries during the global financial crisis of 2008-2009, the paper, “Modelling the Cost of Trade Finance in the Financial Crisis, proposes a dynamic hierarchical linear model (DHLM).  Specifically, it examines how the impact of a set of four macroeconomic indicators on trade finance costs varied in and around the financial crisis.

by Ashwin Malshe, Nicolas Glady, Shantanu Mullick

  • ESSEC Business School (Paris & Singapore)