nep-ifn New Economics Papers
on International Finance
Issue of 2012‒09‒09
six papers chosen by
Vimal Balasubramaniam
National Institute of Public Finance and Policy

  1. Capital Debt -and Equity-Led Capital Flow Episodes By Kristin J. Forbes; Francis E. Warnock
  2. Managing Capital Flows in an Economic Community: The Case of ASEAN Capital account Liberalization By Park, Yung Chul; Takagi, Shinji
  3. Carry Trade and Liquidity Risk: Evidence from Forward and Cross-Currency Swap Markets By Erik Schlogl; Yang Chang
  4. On International Spillovers By Bianco, Dominique; Niang, Abdou-Aziz
  5. Fact and Fiction in FX Arbitrage Processes By Rod Cross; Victor Kozyakin
  6. Which Financial Frictions? Parsing the Evidence from the Financial Crisis of 2007-9 By Tobias Adrian; Paolo Colla; Hyun Song Shin

  1. By: Kristin J. Forbes; Francis E. Warnock
    Abstract: Kristin Forbes and Francis Warnock's "Capital Flow Waves: Surges, Stops, Flight, and Retrenchment," in Journal of International Economics (forthcoming) identifies episodes of extreme capital flow movements—surges, stops, flight, and retrenchment—and finds that global factors, especially global risk, are significantly associated with extreme capital flow episodes whereas domestic macroeconomic characteristics and capital controls are less important. That analysis leads naturally to the question of which types of capital flows are driving the episodes, and if debt- and equity-led episodes differ materially. After identifying debt- and equity-led episodes, we find that most episodes of extreme capital flow movements around the world are debt-led and the factors associated with debt-led episodes are similar to the factors behind episodes identified with aggregate capital flow data. In contrast, equity-led episodes are less frequent, more idiosyncratic, and differ in nature from other episodes.
    Date: 2012–08
  2. By: Park, Yung Chul (Asian Development Bank Institute); Takagi, Shinji (Asian Development Bank Institute)
    Abstract: The paper uses the emerging Association of Southeast Asian Nations (ASEAN) Economic Community as a motivation to explore the issue of capital flow management in an economic community. Although there is an increasingly shared view that capital flow management measures should be part of the routine policy toolkit of emerging market economies, the logic of an economic community appears incompatible with extensive controls on capital flows. Substantial, if not complete, capital account liberalization must therefore take place across ASEAN.
    Keywords: managing capital flows; economic community: asean; capital account liberalization; emerging market economies
    JEL: F33 F36 O53
    Date: 2012–09–03
  3. By: Erik Schlogl (Finance Discipline Group, UTS Business School, University of Technology, Sydney); Yang Chang (Finance Discipline Group, UTS Business School, University of Technology, Sydney)
    Abstract: This study empirically examines the effect of foreign exchange (FX) market liquidity risk and volatility on the excess returns of currency carry trades. In contrast to the existent literature, we construct an alternative proxy of liquidity risk - violations of no arbitrage bounds in the forward and currency swap markets. We also use volatility smile data to capture FX-market specific volatility. The sample data cover periods both before and after the Global Financial Crisis (GFC). Both proxies are significant in explaining the abnormal returns of carry trades, particularly after the GFC. Our findings provide substantial evidence that uncovered interest parity (UIP) puzzle can be resolved after controlling for liquidity risk and market volatility.
    Keywords: uncovered interest rate parity; carry trade; liquidity risk; no-arbitrage bound; volatility
    JEL: F31 G15
    Date: 2012–08–01
  4. By: Bianco, Dominique; Niang, Abdou-Aziz
    Abstract: This study investigates the role of international spillovers in generating productivity gains for a panel of 24 OECD countries during the period between 1971 and 2004. We use recent techniques developed in a common factor framework to characterize the global interdependence implied by international spillovers and the diffusion mechanisms involved. Consistently with some recent studies in this field, the evidence suggests that there are substantial cross-country spillovers mainly related to R&D and human capital variables, which contribute significantly to productivity.
    Keywords: Productivity; Spillovers; R&D; Human capital; Common factors
    JEL: C23 O31 O40
    Date: 2012–02
  5. By: Rod Cross (Department of Economics, University of Strathclyde); Victor Kozyakin (Institute for Information Transmission Problems, Russian Academy of Sciences)
    Abstract: The efficient markets hypothesis implies that arbitrage opportunities in markets such as those for foreign exchange (FX) would be, at most, short-lived. The present paper surveys the fragmented nature of FX markets, revealing that information in these markets is also likely to be fragmented. The "quant"Â workforce in the hedge fund featured in The Fear Index novel by Robert Harris would have little or no reason for their existence in an EMH world. The four currency combinatorial analysis of arbitrage sequences contained in Cross, Kozyakin, O'Callaghan, Pokrovskii and Pokrovskiy (2012) is then considered. Their results suggest that arbitrage processes, rather than being self-extinguishing, tend to be periodic in nature. This helps explain the fact that arbitrage dealing tends to be endemic in FX markets.
    Keywords: Triangular Arbitrage; FX Markets; Periodic Sequences; Asynchronous Systems; The Fear Index
    JEL: G10 F31
    Date: 2012–07
  6. By: Tobias Adrian; Paolo Colla; Hyun Song Shin
    Abstract: The financial crisis of 2007-9 has sparked keen interest in models of financial frictions and their impact on macro activity. Most models share the feature that borrowers suffer a contraction in the quantity of credit. However, the evidence suggests that although bank lending to firms declines during the crisis, bond financing actually increases to make up much of the gap. This paper reviews both aggregate and micro level data and highlights the shift in the composition of credit between loans and bonds. Motivated by the evidence, we formulate a model of direct and intermediated credit that captures the key stylized facts. In our model, the impact on real activity comes from the spike in risk premiums, rather than contraction in the total quantity of credit.
    JEL: E2 E5 G01 G21
    Date: 2012–08

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