nep-ifn New Economics Papers
on International Finance
Issue of 2013‒01‒07
nine papers chosen by
Vimal Balasubramaniam
University of Oxford

  1. Why do firms issue abroad? Lessons from onshore and offshore corporate bond finance in Asian emerging markets By Paul Mizen; Frank Packer; Eli M Remolona; Serafeim Tsoukas
  2. Capital Flows and the Risk-Taking Channel of Monetary Policy By Valentina Bruno; Hyun Song Shin
  3. Convertibility restriction in China’s foreign exchange market and its impact on forward pricing By Wang, Yi David
  4. When the cat's away the mice will play: does regulation at home affect bank risk taking abroad? By Steven Ongena; Alexander Popov; Gregory F. Udell
  5. Financial Globalisation and the Crisis By Philip R. Lane
  6. Distance Sensitivity of Export: A Firm-Product Level Approach By Jienwatcharamongkhol, Viroj
  7. Heterogeneity and cross-country spillovers in macroeconomic-financial linkages By Matteo Ciccarelli; Eva Ortega; Maria Teresa Valderrama
  8. The global financial crisis and indian banks: survival of the fittest? By Eichengreen, Barry; Gupta, Poonam
  9. Carry Trade and Systemic Risk: Why are FX Options so Cheap? By Ricardo J. Caballero; Joseph B. Doyle

  1. By: Paul Mizen; Frank Packer; Eli M Remolona; Serafeim Tsoukas
    Abstract: Corporate bond issuers in emerging economies in Asia have often had a choice between an onshore market and an offshore one. Since 1998, however, many of these issuers have increasingly turned to the onshore market. This paper investigates systematically what factors have influenced this choice between markets for issuers in eight emerging economies - China, Hong Kong SAR, Indonesia, Korea, Malaysia, the Philippines, Singapore and Thailand. For variables measuring market depth and liquidity, the availability of hedging instruments, and the size of the investor base, we rely on BIS statistics that have not been used in this literature before. We combine these market-level data with firm-level data in an unbalanced panel for the eight countries covering the period 1995 to 2007. We control for variables representing agency, static trade-off and risk management theories of the capital structure. Our results show that the choice between domestic and foreign markets has changed over time in large part because of the increased depth of the onshore market. The firms that benefit from such market development tend to be the unseasoned issuers rather than the seasoned ones.
    Keywords: bond financing, offshore markets, derivatives, capital structure, emerging markets, market depth, Asian bond markets
    Date: 2012–12
  2. By: Valentina Bruno; Hyun Song Shin
    Abstract: This paper examines the relationship between low interests maintained by advanced economy central banks and credit booms in emerging economies. In a model with crossborder banking, low funding rates increase credit supply, but the initial shock is amplified through the "risk-taking channel" of monetary policy where greater risk-taking interacts with dampened measured risks that are driven by currency appreciation to create a feedback loop. In an empirical investigation using VAR analysis, we find that expectations of lower short-term rates dampen measured risks and stimulate cross-border banking sector capital flows.
    Keywords: Capital flows, exchange rate appreciation, credit booms
    Date: 2012–12
  3. By: Wang, Yi David (BOFIT)
    Abstract: In contrast to the well established markets such as the dollar-euro market, recent CIP deviations observed in the onshore dollar-RMB forward market were primarily caused by conversion restrictions in the spot market rather than by changes in credit risk and/or liquidity constraint. This paper proposes a theoretical framework by which the Chinese authorities impose conversion restrictions in the spot market in an attempt to achieve capital flow balance, but face the tradeoff between achieving such balance and disturbing current account transactions. Consequently, the level of conversion restriction should increase with the amount of capital account transactions and decrease with the amount of current account transactions. Such conversion restriction in turn places a binding constraint on forward traders’ ability to cover their forward positions, resulting in the observed CIP deviation. More particularly, the model predicts that the onshore forward rate will equal a weighted average of the CIP-implied forward rate and the market’s expectation of the future spot rate, were the weighting is determined by the level of conversion restriction. As a secondary result, the model also implies that offshore non-deliverable forwards reflect the market’s expectation of the future spot rate. Our empirical results are consistent with these predictions.
    Keywords: forward foreign exchange; China; convertibility
    JEL: F30 F31 F33
    Date: 2012–11–27
  4. By: Steven Ongena (Tilburg University; CEPR - Centre for Economic Policy Research); Alexander Popov (European Central Bank); Gregory F. Udell (Indiana University Bloomington)
    Abstract: This paper provides the first empirical evidence that bank regulation is associated with cross-border spillover effects through the lending activities of large multinational banks. We analyze business lending by 155 banks to 9613 firms in 1976 different localities across 16 countries. We find that lower barriers to entry, tighter restrictions on bank activities, and higher minimum capital requirements in domestic markets are associated with lower bank lending standards abroad. The effects are stronger when banks are less efficiently supervised at home, and are observed to exist independently from the impact of host-country regulation. JEL Classification: G21, G28, G32
    Keywords: Bank regulation, cross-border financial institutions, lending standards, financial risk
    Date: 2012–11
  5. By: Philip R. Lane
    Abstract: The global financial crisis provides an important testing ground for the financial globalisation model. We ask three questions. First, did financial globalisation materially contribute to the origination of the global financial crisis? Second, once the crisis occurred, how did financial globalisation affect the incidence and propagation of the crisis across different countries? Third, how has financial globalisation affected the management of the crisis at national and international levels?
    Keywords: financial globalization, global financial crisis
    Date: 2012–12
  6. By: Jienwatcharamongkhol, Viroj (Department of Economics, Lund University)
    Abstract: Recent literature suggests that product characteristics assert different distance sensitivity on trade flows. But the empirical evidences still find conflicting results. Previous studies have examined the effect of distance on the export decisions across different product groups at the aggregate level. In this paper the analyses are executed at a disaggregated firm-product level to examine the issue based on individual firm's decisions. Empirically, I employ a gravity model on Swedish micro-level export data in the manufacturing sector. The results suggest that homogeneous products are more sensitive to distance than differentiated products for the export selection and are insignificant for the export intensity.
    Keywords: distance sensitivity; export decisions; gravity model; micro-data
    JEL: F12 F14 F41
    Date: 2012–12–06
  7. By: Matteo Ciccarelli (European Central Bank); Eva Ortega (Banco de España); Maria Teresa Valderrama (Oesterreichische Nationalbank)
    Abstract: We investigate heterogeneity and spillovers in macro-financial linkages across developed economies, with a particular emphasis on the most recent recession. A panel Bayesian VAR model including real and financial variables identifies a statistically significant common component, which proves to be very significant during the most recent recession. Nevertheless, countryspecific factors remain important, which explains the heterogeneous behaviour across countries observed over time. Moreover, spillovers across countries and between real and financial variables are found to matter: a shock to a variable in a given country affects all other countries, and the transmission seems to be faster and deeper between financial variables than between real variables. Finally, shocks spill over in a heterogeneous way across countries
    Keywords: financial crisis, macro-financial linkages, panel VAR models
    JEL: C11 C33 E32 F44
    Date: 2012–12
  8. By: Eichengreen, Barry; Gupta, Poonam
    Abstract: The Indian banking system was initially thought to be insulated from the global financial crisis owing to heavy public ownership and cautious management. It was thus a surprise when some banks experienced a deposit flight, as depositors shifted their money toward government-owned banks and specifically toward the State Bank of India, the largest public bank. While there was some tendency for depositors to favour healthier banks and the banks with more stable funding, the reallocation of deposits toward the State Bank of India in particular cannot be explained by these factors alone. Nor can it be explained by the impact of explicit capital injections by the government into some public-sector banks. Rather it appears that the implicit guarantee of the liabilities of the country’s largest public bank dominated other considerations.
    Keywords: State-owned banks; banking and financial crises
    JEL: G28 G20 G01 G21
    Date: 2012–12
  9. By: Ricardo J. Caballero; Joseph B. Doyle
    Abstract: In this paper we document first that, in contrast with their widely perceived excess returns, popular carry trade strategies yield low systemic-risk-adjusted returns. In particular, we show that carry trade returns are highly correlated with the return of a VIX rolldown strategy —i.e., the strategy of shorting VIX futures and rolling down its term structure— and that the latter strategy performs at least as well as beta-adjusted carry trades, for individual currencies and diversified portfolios. In contrast, hedging the carry with exchange rate options produces large returns that are not a compensation for systemic risk. We show that this result stems from the fact that the corresponding portfolio of exchange rate options provides a cheap form of systemic insurance.
    JEL: F31 G01 G15
    Date: 2012–12

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