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on International Finance |
| By: | Ojo, Marianne |
| Abstract: | Why are some global financial crises more difficult to recover from and overcome than others? What steps are necessary in ensuring that financial stability and recovery is facilitated? What kind of environment has the previous financial environment evolved to and what kind of financial products have also contributed to greater vulnerability in the triggering of systemic risks? These are amongst some of the questions which this book attempts to address. In highlighting the role and importance of various actors in post crises reforms and the huge impacts certain factors and products have contributed in exacerbating the magnitude and speed of transmission of financial contagion, it also provides an insight into why global financial crises have become more complicated to address than was previously the case. As well as considering and highlighting why matters related to pro cyclicality and capital measures should not constitute the sole focus of attention of the G20's initiatives, the book is aimed at identifying other important issues such as liquidity risks and requirements which have constituted, to a large extent, the focus of international standard setters and regulators. It also aims to direct regulators, central bank officials and supervisors, academics, business and legal professionals and other relevant interested parties in the field to current and previously ignored issues such as the "cartelisation" of capital markets. The need and concern for increased regulation of bond, equity markets, as well as other complex financial instruments which can be traded in OTC (Over-the-Counter) derivatives markets is evidenced by Basel III's focus. "Cartelisation" and organised activities relating to rate rigging in global capital markets have been evidenced recently by sophisticated EURIBOR and LIBOR rate rigging practices and occurences. The aims and objectives of the book would not be complete by merely identifying and highlighting the general root causes of global financial crises, and current issues to be focussed on. Hence each chapter will also recommend (as well as highlight) measures which should be (and have been) put forward in order to address the issues and factors which contribute to the magnitude and severity of global financial crises. |
| Keywords: | Financial stability; pro cyclicality; supervisors; systemic risks; counter party risks |
| JEL: | E51 E52 E58 K2 M4 M41 |
| Date: | 2013–04–29 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:47350&r=ifn |
| By: | Adrien Verdelhan (MIT Sloan) |
| Abstract: | Changes in exchange rates are not random. Two economically motivated factors account for 20% to 90% of the daily, monthly, quarterly, and annual exchange rate movements in developed countries and in emerging and developing countries with floating exchange rates. The different shares of systematic variation across currencies are related to financial and macroeconomic measures of world integration. Across countries, the more integrated the equity and bond markets, the higher the share of systematic currency variation. These results have direct implications for asset managers, motivate further work on exchange rates, and offer new insights into international economics and finance models. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:763&r=ifn |
| By: | Philip R. Lane |
| Abstract: | We investigate the behaviour of gross capital flows and net capital flows for euro area member countries. We highlight the extraordinary boom-bust cycles in both gross flows and net flows since 2003. We also show that the reversal in net capital flows during the crisis has been very costly in terms of macroeconomic and financial outcomes for the high-deficit countries. Finally, we describe the reforms that can improve macro-financial stability across the euro area. |
| JEL: | E42 F32 F41 |
| Date: | 2013–04 |
| URL: | http://d.repec.org/n?u=RePEc:euf:ecopap:0497&r=ifn |
| By: | Jeremy Graveline (University of Minnesota); Irina Zviadadze (London Business School); Mikhail Chernov (London School of Economics) |
| Abstract: | We quantify the sources of risk in currency returns as a first step toward understanding the returns to currency speculation. To do this, we develop and estimate an empirical model of exchange rate dynamics using daily data for four currencies relative to the US dollar: the Australian dollar, the British pound, the Swiss franc, and the Japanese yen. The model includes (i) normal shocks with stochastic variance, (ii) jumps up and down in the exchange rate, and (iii) jumps in the variance. We identify these components using data on exchange rates and at-the-money implied variances. We nd that the probability of an upward (downward) jump in the exchange rate, associated with depreciation (appreciation) of the US dollar, is increasing in the domestic (foreign) interest rate. The probability of jumps in variance is increasing in the variance but not related to interest rates. Many of the jumps in exchange rates are associated with macroeconomic and political news, but jumps in variance are not. On average, jumps account for 25% (and can be as high as 40%) of total currency risk over horizons of one to three months. Preliminary analysis suggests that properties of currency returns correspond to observed option smiles and that jump risk is priced. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:753&r=ifn |
| By: | Elyas Elyasiani; Loretta J. Mester; Michael S. Pagano |
| Abstract: | We examine investors’ reactions to announcements of large capital infusions by U.S. financial institutions (FIs) from 2000 to 2009. These infusions include private market infusions (seasoned equity offerings (SEOs)) as well as injections of government capital under the Troubled Asset Relief Program (TARP). The sample period covers both business cycle expansions and contractions, and the recent financial crisis. We present evidence on the factors affecting FIs’ decisions to raise capital, the determinants of investor reactions, and post-infusion risk-taking of the recipients, as well as a sample of matching FIs. Investors reacted negatively to the news of private market SEOs by FIs, both in the immediate term (e.g., the two days surrounding the announcement) and over the subsequent year, but positively to TARP injections. Reactions differed depending on the characteristics of the FIs, and the stage of the business cycle. More financially constrained institutions were more likely to have raised capital through private market offerings during the period prior to TARP, and firms receiving a TARP injection tended to be riskier and more levered. In the case of TARP recipients, they appeared to finance an increase in lending (as a share of assets) with more stable financing sources such as core deposits, which lowered their liquidity risk. However, we find no evidence that banks’ capital adequacy increased after the capital injections.increased after the capital injections. ; Supersedes Working Paper 11-46. |
| Keywords: | Securities ; Financial services industry ; Banks and banking |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:13-23&r=ifn |
| By: | Andreas Stathopoulos (University of Southern California); Andrea Vedolin (London School of Economics); Philippe Mueller (London School of Economics) |
| Abstract: | Foreign exchange correlation is a key driver of risk premia in the cross-section of carry trade returns. First, we show that the correlation risk premium, defined as the difference between the risk-neutral and objective measure correlation is large (15% per year) and highly time-varying. Second, sorting currencies according to their exposure with correlation innovations yields portfolios with attractive risk and return characteristics. We also find that high (low) interest rate currencies have negative (positive) loadings on the correlation risk factor. To address our empirical findings, we consider a multi-country general equilibrium model with time-varying risk aversion generated by external habit preferences. In the model, currency risk premia mostly compensate for exposure to global risk aversion, defined as a weighted average of country risk aversions. Given countercyclical real interest rates, the model can also address the forward premium puzzle, as high interest rate currencies are exposed to (while low interest rate currencies provide a hedge to) global risk aversion risk. We also show that high global risk aversion is associated with high conditional exchange rate variance and covariance, providing theoretical justification for sorting currencies on their exposure to fluctuations of exchange rate conditional second moments. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:818&r=ifn |
| By: | Daniel Gros; Cinzia Alcidi |
| Abstract: | A ‘sudden stop’ to (private) capital inflows is usually very disruptive to an economy because it forces an almost immediate reversal in the current account unless the country in question receives substantial balance of payments assistance. The analysis presented in this paper starts from the observation that two groups of European countries, neither of which could use the exchange rate as an adjustment instrument, experienced a sudden stop after the outbreak of the global financial crisis. The first group comprises five euro area member states under financial stress during the euro area debt crisis (“GIIPS”). The second group comprises four newer EU Member States in Central and Eastern Europe (“BELL”). We highlight the differences in the adjustment paths of these two groups and analyse the factors which can explain them. The main finding is that the adjustment was quicker outside EMU than inside. The shock absorbers provided by the financial ‘plumbing’ of the Eurosystem offset much of the reversal in private capital flows and seem to have created an environment in which the pressure for a quick adjustment was much weaker. We also find that the structure of the domestic banking industry plays a key role. Foreign ownership of banks provided a loss absorber in the BELL favouring a quick correction, while the legacy of the banking crisis in some of GIIPS, where foreign ownership of banks was limited, is likely to weight for long time on their still incomplete. |
| JEL: | E20 F32 F36 H60 |
| Date: | 2013–04 |
| URL: | http://d.repec.org/n?u=RePEc:euf:ecopap:0492&r=ifn |
| By: | Reuven Glick; Sylvain Leduc |
| Abstract: | We examine the effects of unconventional and conventional monetary policy announcements on the value of the dollar using high-frequency intraday data. Identifying monetary policy surprises from changes in interest rate futures prices in narrow windows around policy announcements, we find that surprise easings in monetary policy since the crisis began have had significant effects on the value of the dollar. We document that these changes are comparable to the effects of conventional policy changes prior to the crisis. |
| Keywords: | Dollar ; Monetary policy |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:2013-11&r=ifn |