nep-ifn New Economics Papers
on International Finance
Issue of 2013‒01‒19
five papers chosen by
Vimal Balasubramaniam
University of Oxford

  1. Currency intervention and the global portfolio balance effect: Japanese lessons By Gerlach, Petra; McCauley, Robert N.; Ueda, Kazuo
  2. Financial Flows and Exchange Rates: Challenges Faced by Developing Countries By Raquel Almeida Ramos
  3. Dealing with Exchange Rate Issues: Reserves or Capital Controls? By Raquel Almeida Ramos
  4. Currency mismatch and the sub-prime crisis: firm-level stylised facts from Hungary By Mariann Endrész; Gyõzõ Gyöngyösi; Péter Harasztosi
  5. Probability Weighting of Rare Events and Currency Returns By Chabi-Yo, Fousseni; Song, Zhaogang

  1. By: Gerlach, Petra; McCauley, Robert N.; Ueda, Kazuo
    Abstract: This paper shows that the Japanese foreign exchange interventions in 2003/04 seem to have lowered long-term interest rates in a wide range of countries, including Japan. It seems that this decline was triggered by the investment of the intervention proceeds in US bonds and that a global portfolio balance effect spread the resulting decline in US yields to other bond markets, thus easing global monetary conditions.
    Keywords: exchange/investment/US
    Date: 2012–10
  2. By: Raquel Almeida Ramos (IPC-IG)
    Abstract: With the global financial crisis, emerging developing countries have been experiencing marked cycles of capital flows: significant inflows until the collapse of Lehman Brothers; a sudden outflow in the sequence; a rebound of inflows some months after; and, more recently, more short-lived periods of risk aversion and outflows due to the problems concerning the Euro. This period has been of singular intensity, with cycles changing much more rapidly than previously. The different intensity has major implications for understanding the process, especially regarding the relative importance of push and pull factors and the formulation of policy options. (?)
    Keywords: Financial Flows and Exchange Rates: Challenges Faced by Developing Countries
    Date: 2012–11
  3. By: Raquel Almeida Ramos (IPC-IG)
    Abstract: Developing countries? positions regarding the capital account have changed significantly in the last decade. After a period of wide liberalisation, country authorities have now been constantly increasing their policy toolkit with new instruments to intervene in the capital account and limit the consequences of excessively volatile capital flows. This change is a response to the increasing size and volatility of capital flows, which is associated with the process of financialisation that has been taking place in recent decades, where financial actors and motives have assumed more important roles. The increasing magnitude and volatility of finance-related flows are clearly shown in Figure 1, which presents the net financial flows excluding Foreign Direct Investment (FDI) received by developing and emerging countries since 1990. (?)
    Keywords: Dealing with Exchange Rate Issues: Reserves or Capital Controls?
    Date: 2012–11
  4. By: Mariann Endrész (Magyar Nemzeti Bank (central bank of Hungary)); Gyõzõ Gyöngyösi (Magyar Nemzeti Bank (central bank of Hungary)); Péter Harasztosi (Magyar Nemzeti Bank (central bank of Hungary))
    Abstract: This paper investigates currency mismatch in the Hungarian corporate sector. Using a novel dataset on non-financial firms we first identify firms with mismatch, measure their weight in the economy and show their main characteristics. We then analyze the performance of firms during the crisis. We find that a significant share of firms with FX debt had no natural hedge, i.e. no FX revenues from exports. The firms exposed to currency mismatch had a sizeable share both in real aggregates and on the loan market before the crisis. Firms with currency mismatch tended to be larger and more indebted, which suggests that FX borrowing might have eased their liquidity constraint before the crisis. During the crisis balance sheet effects were likely to be triggered by the large depreciations. Firms with FX loans had a larger fall in investment, and were more likely to go bankrupt. Their deteriorating performance and the reassessment of holding FX debt both by banks and firms led to major changes on the loan market. FX lending became less popular, and firms with mismatch were less likely to get new loans.
    Keywords: currency mismatch, liability dollarisation, firm level data
    JEL: F31 F34 G32 L25
    Date: 2012
  5. By: Chabi-Yo, Fousseni (OH State University); Song, Zhaogang (Federal Reserve Board)
    Abstract: We show that the probability weighting of rare events, accounting for investors' attitudes toward extreme downside losses versus upside gains in non-expected utility models, provides a unified explanation for both time-series and cross-sectional variations of currency portfolio returns. We use a simple structural model to show the link between the probability weighting function and pricing kernel, and then estimate them by non-parametric methods using currency options data from 1996 to 2012. The estimates show that a domestic investor over-weights the likelihood of a substantial depreciation or appreciation of foreign currencies, consistent with experimental studies. A global probability weighting measure of left (right) tail events is highly significant in positively (negatively) predicting future currency returns over time series at both individual and portfolios levels. Furthermore, asset pricing tests show that differences in exposure to our global tail weighting measures, of high versus low interest rate currencies and of high versus low past return currencies, can explain the cross-sectional variation in average excess returns across both carry and momentum portfolios. Moreover, our global tail weighting measures remain significant after controlling for existing currency risk factors in the literature, and frequently drive their significance out, in both time-series and cross-sectional return predictability regressions.
    JEL: G12 G15
    Date: 2012–11

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