nep-ifn New Economics Papers
on International Finance
Issue of 2014‒05‒04
six papers chosen by
Vimal Balasubramaniam
University of Oxford

  1. The two faces of cross-border banking flows: an investigation into the links between global risk, arms-length funding and internal capital markets By Reinhardt, Dennis; Riddiough, Steven
  2. The Impact of Different Types of Foreign Exchange Intervention: An Event Study Approach By Juan José Echavarría; Luis Fernando Melo Velandia; Mauricio Villamizar
  3. Exchange rates, expected returns and risk By Anella Munro
  4. External Balances, Trade Flows and Financial Conditions By Evans, Martin
  5. The international transmission of bank capital requirements: evidence from the United Kingdom By Aiyar, Shekhar; Calomiris, Charles; Hooley, John; Korniyenko , Yevgeniya; Wieladek, Tomasz
  6. Foreign Shocks on Chilean Financial Markets: Spillovers and Comovements Between Bonds and Equity Markets By Marco Morales; Carola Moreno; Camilo Vio

  1. By: Reinhardt, Dennis (Bank of England); Riddiough, Steven (Warwick Business School)
    Abstract: We decompose gross cross-border bank-to-bank funding between arms-length (interbank) and related (intragroup) funding, and show that while interbank funding is withdrawn when global risk is high, intragroup funding remains stable during these periods, despite being more volatile on average. We disaggregate intragroup funding further and find advanced economy parent banks benefit from inflows during episodes of heightened global risk. However, we do not find evidence of significantly reduced intragroup funding to foreign affiliates during these periods. Our results are in contradiction with theoretical predictions on the behaviour of cross-border banking flows, and help explain why certain banking systems lost more cross-border bank-to-bank funding than others during the global financial crisis.
    Keywords: Cross-border banking flows; global risk; parent banks and foreign affiliates
    JEL: F32 F34 G21
    Date: 2014–04–17
  2. By: Juan José Echavarría; Luis Fernando Melo Velandia; Mauricio Villamizar
    Abstract: To date, there is still great controversy as to which exchange rate model should be used or which monetary channel should be considered, when measuring the effects of monetary policy. Since most of the literature relies on structural models to address identification problems, the validity of results largely turn on how accurate the assumptions are in describing the full extent of the economy. In this paper we compare the effect of different types of central bank interventions using an event study approach for the Colombian case during the period 2000-2012, without imposing restrictive parametric assumptions or without the need to adopt a structural model. We find that all types of interventions (international reserve accumulation options, volatility options and discretionary) have been successful according to the smoothing criterion. In particular, volatility options seemed to have the strongest effect. We find that results are robust when using different windows sizes and counterfactuals
    Keywords: Central bank intervention, foreign exchange intervention mechanisms, event study.
    JEL: E52 E58 F31
    Date: 2013–10–09
  3. By: Anella Munro (Reserve Bank of New Zealand)
    Abstract: According to theory, higher expected foreign risk-free returns and foreign currency risk both increase foreign yields, but have opposing effects on the value of the foreign currency. This paper exploits that relationship to jointly identify the unobserved risk-free return and risk premium components of exchange rates and expected relative returns. When risk and return are jointly modelled over a 10-year horizon, UIP cannot be rejected for any of the eight advanced country USD currency pairs examined. Innovations in the currency premium are correlated with 'speculative' positioning in foreign exchange markets, and for non-reserve currencies, with 'VIX' risk aversion. Innovations in the risk-free component are correlated with changes in nominal short-term interest rates. Both expected returns and risk play important roles in exchange rate dynamics.
    JEL: F31 G12
    Date: 2014–01
  4. By: Evans, Martin
    Abstract: This paper studies how changing expectations concerning future trade and financial con- ditions are reflected in international external positions. In the absence of Ponzi schemes and arbitrage opportunities, the net foreign asset position of any country must, as a matter of theory, equal the expected present discounted value of future trade deficits, discounted at the cumulated world stochastic discount factor (SDF) that prices all freely traded financial assets. I study the forecasting implications of this theoretical link in 12 countries (Australia, Canada, China, France, Germany, India, Italy, Japan, South Korea, Thailand, The United States and The United Kingdom) between 1970 and 2011. I find that variations in the ex- ternal positions of most countries reflect changing expectations about trade conditions far into the future. I also find the changing forecasts for the future path of the world SDF is reflected in the dynamics of the U.S. external position.
    Keywords: Global Imbalances, Foreign Asset Positions, Current Accounts, Trade Flows, International Asset Pricing
    JEL: F3 F31 F32 F34
    Date: 2014–05–01
  5. By: Aiyar, Shekhar (International Monetary Fund); Calomiris, Charles (Columbia Business School); Hooley, John (International Monetary Fund); Korniyenko , Yevgeniya (International Monetary Fund); Wieladek, Tomasz (Bank of England)
    Abstract: We use data on UK banks’ minimum capital requirements to study the impact of changes to bank-specific capital requirements on cross-border bank loan supply from 1999 Q1 to 2006 Q4. By examining a sample in which each recipient country has multiple relationships with UK-resident banks, we are able to control for demand effects. We find a negative and statistically significant effect of changes to banks’ capital requirements on cross-border lending: a 100 basis point increase in the requirement is associated with a reduction in the growth rate of cross-border credit of 5.5 percentage points. We also find that banks tend to favour their most important country relationships, so that the negative cross-border credit supply response in ‘core’ countries is significantly less than in others. Banks tend to cut back cross-border credit to other banks (including foreign affiliates) more than to firms and households, consistent with shorter maturity, wholesale lending which is easier to roll off and may be associated with weaker borrowing relationships.
    Keywords: Cross-border lending; loan supply; capital requirements; international transmission
    JEL: E44 E51 E52 G18 G21
    Date: 2014–04–17
  6. By: Marco Morales; Carola Moreno; Camilo Vio
    Abstract: The domestic impact of external shocks will depend on the degree of coupling of domestic assets to foreign markets, but also on the spillovers among assets. The covariance between different types of assets could be affected by the new information. Changes in the covariance could come from a stronger rebalancing between stocks and bonds. Therefore, we will analyze four different assets – government bonds, corporate bonds, money market instruments and equity – and study the conditional correlation between them. We find that the corporate bond market tends to increase coupling in turbulent times, while money market decreases. We propose to test international spillovers taking into account a methodology for estimating the conditional mean, variance and covariance on domestic bond and equity markets, while considering that shocks may have asymmetric effects depending if the news are good or bad.
    Date: 2014–02

This nep-ifn issue is ©2014 by Vimal Balasubramaniam. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.