nep-ifn New Economics Papers
on International Finance
Issue of 2014‒03‒15
three papers chosen by
Vimal Balasubramaniam
University of Oxford

  1. Macroprudential Policies as Buffer Against Volatile Cross-border Capital Flows By Ahmet Faruk Aysan; Salih Fendoglu; Mustafa Kilinc
  2. Foreign ownership and market power in banking: Evidence from a world sample By Delis, Manthos D; Kokas, Sotiris
  3. Foreign Exchange Risk and the Predictability of Carry Trade Returns By Gino Cenedese; Lucio Sarno; Ilias Tsiakas

  1. By: Ahmet Faruk Aysan; Salih Fendoglu; Mustafa Kilinc
    Abstract: This paper investigates the effectiveness of macroprudential policies introduced by Turkey in late 2010. The unprecedented quantitative easing policies of advanced countries after the global financial crisis have presented serious financial stability concerns for most emerging countries including Turkey. To cope with these challenges, Turkey has devised new policy tools such as asymmetric interest rate corridor and reserve option mechanism. From the perspective of capital flows, the interest rate corridor works mainly through stabilizing supply of foreign funds, and the reserve option mechanism through decreasing the sensitivity of equilibrium exchange rate to shifts in the demand for foreign funds. Using a large panel of 46 countries and employing Bruno and Shin (2013a,b)’s methodology, we investigate whether the new policy framework in Turkey has been successful in cushioning the economy from volatile cross-border capital flows from a comparative perspective. The results show that, after controlling for a set of domestic and external variables and relative to a group of advanced and emerging countries, cross-border capital flows to Turkey have been less sensitive to global factors after the implementation of macroprudential policies.
    Keywords: Capital Flows, Macroprudential Policies
    JEL: E58 F32 F34
    Date: 2014
  2. By: Delis, Manthos D; Kokas, Sotiris
    Abstract: Using a novel global data set with bank-year estimates of market power, we examine the impact of (i) the ownership status (foreign or domestic) of individual banks and (ii) the country-level trends in foreign bank presence on our market power estimates. We find that the ownership status of individual banks does not explain banks’ market power. In contrast, the country-level trends in foreign bank ownership have a positive and significant effect on banks’ market power that is primarily due to the fact that most foreign bank entry occurs through mergers and acquisitions and not through de novo penetration. We also find that the positive nexus between foreign bank presence and market power is considerably weaker in countries with well-capitalized banks.
    Keywords: Bank market power; competition; foreign banks; world sample
    JEL: D4 F23 G21
    Date: 2014–02–26
  3. By: Gino Cenedese (Bank of England, UK); Lucio Sarno (City University London, UK; CEPR, UK); Ilias Tsiakas (University of Guelph, Canada)
    Abstract: This paper provides an empirical investigation of the time-series predictive ability of foreign exchange risk measures on the return to the carry trade, a popular investment strategy that borrows in low-interest currencies and lends in high-interest currencies. Using quantile regressions, we nd that higher market variance is signicantly related to large future carry trade losses, which is consistent with the unwinding of the carry trade in times of high volatility. The decomposition of market variance into average variance and average correlation shows that the predictive power of market variance is primarily due to average variance since average correlation is not signicantly related to carry trade returns. Finally, a new version of the carry trade that conditions on market variance generates performance gains net of transaction costs.
    Keywords: Exchange Rates; Carry Trade; Market Variance; Average Variance; Average Correlation; Quantile Regression
    JEL: F31 G15 G17
    Date: 2014–02

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