nep-ifn New Economics Papers
on International Finance
Issue of 2014‒06‒22
six papers chosen by
Vimal Balasubramaniam
University of Oxford

  1. Capital Controls and Recovery from the Financial Crisis of the 1930s By Kris James Mitchener; Kirsten Wandschneider
  2. International banking and liquidity risk transmission: lessons from across countries By Buch, Claudia M.; Goldberg, Linda S.
  3. Empirical properties of the foreign exchange interdealer market By Mehdi Lallouache; Frédéric Abergel
  4. Uncovered Equity Parity and Rebalancing in International Portfolios By Curcuru, Stephanie E.; Thomas, Charles P.; Warnock, Francis E.; Wongswan, Jon
  5. External Equity Financing Shocks, Financial Flows, and Asset Prices By Frederico Belo; Xiaoji Lin; Fan Yang
  6. Swedish Stock and Bond Returns, 1856–2012 By Waldenström, Daniel

  1. By: Kris James Mitchener; Kirsten Wandschneider
    Abstract: We examine the first widespread use of capital controls in response to a global or regional financial crisis. In particular, we analyze whether capital controls mitigated capital flight in the 1930s and assess their causal effects on macroeconomic recovery from the Great Depression. We find evidence that they stemmed gold outflows in the year following their imposition; however, time-shifted, difference-in- differences (DD) estimates of industrial production, prices, and exports suggest that exchange controls did not accelerate macroeconomic recovery relative to countries that went off gold and floated. Countries imposing capital controls also appear to perform similar to the gold bloc countries once the latter group of countries finally abandoned gold. Time series analysis suggests that countries imposing capital controls refrained from fully utilizing their newly acquired monetary policy autonomy.
    JEL: E61 F32 F33 F41 G15 N1 N2
    Date: 2014–06
  2. By: Buch, Claudia M. (Federal Reserve Bank of New York); Goldberg, Linda S. (Federal Reserve Bank of New York)
    Abstract: Activities of international banks have been at the core of discussions on the causes and effects of the international financial crisis. Yet we know little about the actual magnitudes and mechanisms for transmission of liquidity shocks through international banks, including the reasons for heterogeneity in transmission across banks. The International Banking Research Network, established in 2012, brings together researchers from around the world with access to micro-level data on individual banks to analyze issues pertaining to global banks. This paper summarizes the common methodology and results of empirical studies conducted in eleven countries to explore liquidity risk transmission. Among the main results is, first, that explanatory power of the empirical model is higher for domestic lending than for international lending. Second, how liquidity risk affects bank lending depends on whether the banks are drawing on official-sector liquidity facilities. Third, liquidity management across global banks can be important for liquidity risk transmission into lending. Fourth, there is substantial heterogeneity in the balance sheet characteristics that affect banks’ responses to liquidity risk. Overall, balance sheet characteristics of banks matter for differentiating their lending responses, mainly in the realm of cross-border lending.
    Keywords: international banking; liquidity; transmission; central bank liquidity; uncertainty; regulation; crises
    JEL: F34 G01 G21
    Date: 2014–05–01
  3. By: Mehdi Lallouache (FiQuant - Chaire de finance quantitative - Ecole Centrale Paris, MAS - Mathématiques Appliquées aux Systèmes - EA 4037 - Ecole Centrale Paris); Frédéric Abergel (FiQuant - Chaire de finance quantitative - Ecole Centrale Paris, MAS - Mathématiques Appliquées aux Systèmes - EA 4037 - Ecole Centrale Paris)
    Abstract: Using a new high frequency quality data set we provide a precise empirical study of the interdealer spot market. We check that the main stylized facts of financial time series are valid for the FX market: fat-tailed distribution of returns, aggregational normality and volatility clustering. We report two standard microstructure phenomena: microstructure noise effects in the signature plot and the Epps effect. We find an unusual shape for the average book, the spread distribution being bimodal. We construct the order flow and analyse its main characteristics: volume, placement, arrival intensity and sign. Many quantities have been dramatically affected by the decrease of the tick size in March 2011. We argue that the coexistence of manual traders and algorithmic traders, who react differently to the new tick size, leads to a strong price clustering in all types of orders and affects the price formation.
    Date: 2013–12–12
  4. By: Curcuru, Stephanie E. (Board of Governors of the Federal Reserve System (U.S.)); Thomas, Charles P. (Board of Governors of the Federal Reserve System (U.S.)); Warnock, Francis E. (University of Virginia); Wongswan, Jon (Phatra Securities Public Company Limited)
    Abstract: Portfolio rebalancing is a key driver of the Uncovered Equity Parity (UEP) condition. According to UEP, when foreign equity holdings outperform domestic holdings, domestic investors are exposed to higher exchange rate exposure and hence repatriate some of the foreign equity to decrease their exchange rate risk. By doing so, foreign currency is sold, leading to foreign currency depreciation. We examine the relationship between U.S. investors' portfolio reallocations and returns and find some evidence consistent with UEP: Portfolio shifts are related to past returns in the underlying equity markets. But we argue that a motive other than reducing currency risk exposure is likely behind this rebalancing. In particular, U.S. investors may be exploiting mean reversion in underlying equity markets, rebalancing away from equity markets that recently performed well and moving into equity markets market just prior to relatively strong performance. Such behavior suggests tactical reallocations to increase returns rather than reduce risk.
    Keywords: Exchange rate determination; international returns; equity portfolios
    Date: 2014–05–15
  5. By: Frederico Belo; Xiaoji Lin; Fan Yang
    Abstract: The ability of corporations to finance its operations by issuing new equity varies with macroeconomic conditions, because the time varying macroeconomic conditions affect investors’ (or workers’) willingness to pay for new equity. We document that an empirical proxy of the shocks to the cost of equity issuance captures systematic risk in the economy, even controlling for the impact of aggregate productivity (or stock market) shocks. Exposure to this shock helps price the cross section of stock returns including book-to-market, size, investment, debt growth, and issuance portfolios. We then propose a dynamic investment-based model that features an aggregate shock to the firms’ cost of external equity issuance, and a collateral constraint. Our central finding is that time- varying external financing costs are important for the model to quantitatively capture the joint dynamics of firms’ real quantities, financing flows, and asset prices. Furthermore, the model also replicates the failure of the unconditional CAPM in pricing the cross-sectional expected returns.
    JEL: E23 E44 G12
    Date: 2014–06
  6. By: Waldenström, Daniel (Department of Economics, Uppsala University)
    Abstract: This chapter presents historical evidence about Swedish stock prices, dividends, and yields on government fixed-interest securities. Monthly returns are presented since 1901 for stocks, since 1874 for government long-term bonds and since 1856 for short-term Treasury bills or central bank discount rates. Annual stock price and returns indices from 1870 are also presented. Altogether, these series comprise the longest financial asset price database for Sweden to date. An important ambition is to provide information about the quality of the financial data, how they are constructed and how they are modified so as to ensure consistency across time. The chapter also outlines the basic institutional and economic framework of the Swedish stock and money markets. Research has shown that asset prices are influenced by the extent of trading activity as well as by the legal setting and microstructural characteristics. Finally, the chapter offers some initial analysis of the new evidence: calculation of returns for different periods, examination of trends and trend breaks in returns, dividends, volatility and cross-country returns correlations, and computation of equity risk premia across holding periods and historical eras.
    Keywords: Historical stock returns; Historical bond yields; Stockholm Stock Exchange; Equity risk premium
    JEL: G12 N23 N24
    Date: 2014–06–10

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