nep-ifn New Economics Papers
on International Finance
Issue of 2015‒01‒09
four papers chosen by
Vimal Balasubramaniam
University of Oxford

  1. Common Macro Factors and Currency Premia By Filippou, Ilias; Taylor, Mark P
  2. External Liabilities and Crises By Catão, Luis A. V.; Milesi-Ferretti, Gian Maria
  3. The Macroeconomic Effects of Debt- and Equity-Based Capital Inflows By Scott Davis
  4. The Impact of Hedge Funds on Asset Markets By Kruttli, Mathias; Patton, Andrew J; Ramadorai, Tarun

  1. By: Filippou, Ilias; Taylor, Mark P
    Abstract: We study the role of domestic and global factors on payoffs of portfolios built to mimic carry, dollar carry and momentum strategies. We construct domestic and global factors from a large dataset of macroeconomic and financial variables and find that global equity market factors render strong predictive power for carry trade returns, while U.S. inflation and consumption variables drive dollar carry trade payoffs and momentum returns are driven by global commodity and U.S. inflation factors. We find evidence of predictability in the exchange rate component of each strategy and demonstrate strong economic value to a risk-averse investor with mean-variance preferences.
    Keywords: Carry Trade; Factor Analysis; Foreign Exchange; Forward Premium Puzzle; Momentum
    JEL: F31 G11 G15
    Date: 2014–06
  2. By: Catão, Luis A. V.; Milesi-Ferretti, Gian Maria
    Abstract: We examine the determinants of external crises, focusing on the role of foreign liabilities and their composition. Using a variety of statistical tools and comprehensive data spanning 1970-2011, we find that the ratio of net foreign liabilities to GDP is a significant crisis predictor. This is primarily due to the net position in debt instruments--the effect of net equity liabilities is weaker and net FDI liabilities seem if anything an offset factor. We also find that: i) breaking down net external debt into its gross asset and liability counterparts does not add significant explanatory power to crisis prediction; ii) the current account is a powerful predictor; iii) foreign exchange reserves reduce the likelihood of crisis more than other foreign asset holdings; iv) a parsimonious probit containing those and a handful of other variables has good predictive performance in- and out-of-sample. The latter result stems largely from our focus on external crises sensu stricto.
    Keywords: currency crises; current account imbalances; foreign exchange reserves; international investment positions; sovereign deebt
    JEL: E44 F32 F34 G15 H63
    Date: 2014–07
  3. By: Scott Davis (Hong Kong Institute for Monetary Research and Federal Reserve Bank of Dallas)
    Abstract: This paper will consider whether debt- and equity-based capital inflows have different macroeconomic effects. Using external instruments in a structural VAR, we first identify the component of capital inflows that is driven not by domestic economic and financial conditions but by conditions in the rest of the world. We then estimate the response to an exogenous shock to debt or equity-based capital inflows in a structural VAR model that includes domestic variables like GDP, inflation, the exchange rate, stock prices, credit growth, and interest rates. An exogenous increase in debt inflows leads to a significant increase in GDP, inflation, stock prices and credit growth and an appreciation of the exchange rate. An exogenous increase in equity-based capital inflows has almost no effect on the same variables. Thus the macroeconomic effects of exogenous capital inflows are almost entirely due to changes in debt, not equity-based, capital inflows.
    Keywords: Capital Inflows, Debt, Equity, Macroeconomic Effects
    JEL: F3 F4
    Date: 2014–11
  4. By: Kruttli, Mathias; Patton, Andrew J; Ramadorai, Tarun
    Abstract: This paper provides empirical evidence of the impact of hedge funds on asset markets. We construct a simple measure of the aggregate illiquidity of hedge fund portfolios, and show that it has strong in- and out-of-sample forecasting power for 72 portfolios of international equities, corporate bonds, and currencies over the 1994 to 2013 period. The forecasting ability of hedge fund illiquidity for asset returns is in most cases greater than, and provides independent information relative to, well-known predictive variables for each of these asset classes. We construct a simple equilibrium model based on liquidity provision by hedge funds to noise traders to rationalize our findings, and empirically verify auxiliary predictions of the model.
    Keywords: bonds; currencies; equities; hedge funds; liquidity; return predictability
    JEL: G11 G12 G14 G23
    Date: 2014–09

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