nep-ifn New Economics Papers
on International Finance
Issue of 2015‒07‒25
three papers chosen by
Vimal Balasubramaniam
University of Oxford

  1. What moves international stock and bond markets? By Cenedese, Gino; Mallucci, Enrico
  2. Safe haven currencies: a portfolio perspective By Cenedese, Gino
  3. Global liquidity and external bond issuance in emerging markets and developing economies By Feyen,Erik H.B.; Ghosh,Swati R.; Kibuuka,Katie; Farazi,Subika

  1. By: Cenedese, Gino (Bank of England); Mallucci, Enrico (London School of Economics)
    Abstract: We study the relation between international mutual fund flows and the different return components of aggregate equity and bond markets. First, we decompose international equity and bond market returns into changes in expectations of future real cash payments, interest rates, exchange rates, and discount rates. News about future cash flows, rather than discount rates, is the main driver of international stock returns. This evidence is in contrast with the typical results reported only for the United States. Inflation news instead is the main driver of international bond returns. Next, we turn to the interaction between these return components and international portfolio flows. We find evidence consistent with price pressure, short-term trend chasing, and short-run overreaction in the equity market. We also find that international bond flows to emerging markets are more sensitive to interest rate shocks than equity flows.
    Keywords: International capital flows; return decomposition; international equity markets; international bond markets; mutual funds.
    JEL: F31 G15
    Date: 2015–07–17
  2. By: Cenedese, Gino (Bank of England)
    Abstract: Currency portfolios exhibit asymmetric correlations: during periods of bear, volatile world equity markets, currency portfolios provide different hedging benefits than in bull markets. I show how these time-varying hedging benefits depend on currency characteristics. This paper also illustrates how the presence of regime shifts in financial markets affects optimal portfolio choice across currency portfolios: during bear markets, investors are better off by unwinding carry trade positions, and by following currency momentum. Also, diversification benefits increase by holding undervalued currencies and currencies of countries with strong current accounts and international investment positions.
    Keywords: Foreign exchange; safe haven currencies; portfolio choice; uncovered interest rate parity; carry trade; purchasing power parity; Markov-switching.
    JEL: F31 G15
    Date: 2015–07–17
  3. By: Feyen,Erik H.B.; Ghosh,Swati R.; Kibuuka,Katie; Farazi,Subika
    Abstract: Using the universe of all externally issued bonds by corporates and sovereigns in emerging and developing economies during 2000-14, this paper analyzes various issuance trends, including the unprecedented post-crisis surge. The paper focuses on external issuance at the country-industry and individual bond levels and finds that global factors matter greatly for emerging and developing economies issuance. A decrease in U.S. expected equity market (or interest rate) volatility, U.S. corporate credit spreads, and U.S. interbank funding costs and an increase in the Federal Reserve?s balance sheet (i) raise the odds that the monthly issuance volume of a country-industry is above its historical average; (ii) decrease individual bond yields and spreads; and (iii) raise bond maturities, after controlling for country pull factors, bond characteristics (for example, type of issuer, industry, and riskiness). Additionally, we document support that the risk-taking channel of exchange rate appreciation also operates for external bond issuance. Moreover, while the paper finds that country pull factors affect the impact of global factors, it does not find consistent evidence for this across the board. This result suggests that, during loose global funding conditions, flows are mostly driven by push factors and do not systematically discriminate between emerging and developing economies. Taken together, the findings suggest that although issuers might be able to benefit from benign international funding conditions, the large issuance volumes, currency risks, and high exposure to global factors could pose external and domestic challenges for policy makers, particularly when global cycles reverse.
    Keywords: Deposit Insurance,Debt Markets,Banks&Banking Reform,Emerging Markets,Currencies and Exchange Rates
    Date: 2015–07–13

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