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on International Finance |
| By: | Philippe Mueller; Andreas Stathopoulos; Andrea Vedolin |
| Abstract: | We document that cross-sectional FX correlation disparity is countercyclical, as exchange rate pairs with high average correlation become more correlated in bad times whereas pairs with low average correlation become less correlated. We show that currencies that perform badly (well) during periods of high cross-sectional disparity in conditional FX correlation yield high (low) average excess returns, suggesting that correlation risk is priced in currency markets. Furthermore, we find a negative cross-sectional relationship between average FX correlations and average FX correlation risk premia. Finally, we propose a no-arbitrage model that can match salient properties of FX correlations and correlation risk premia. |
| Keywords: | Correlation risk; carry trade; international finance; exchange rates. |
| JEL: | R21 |
| Date: | 2014–12–04 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:60955&r=ifn |
| By: | Elías Albagli; Luis Ceballos; Sebastián Claro; Damián Romero |
| Abstract: | We document significant US monetary policy spillovers to domestic bond markets in a sample of 24 countries, including 12 developed and 12 emerging market economies. We rely on an event study methodology where US monetary policy changes are identified as the response of short-term US treasury yields within a narrow window of Federal Reserve meetings, and trace its consequences on domestic bond yields using panel data regressions. We decompose yields for each country into a risk neutral and a term premium component, using the methodology developed by Adrian et al. (2013). We emphasize three main results. First, spillovers to long-term rates in our sample of countries has increased substantially after the global financial crisis: a 100 bp increase in US short-term rates during monetary policy meetings is associated with increases between 70-80 bp on international bond yields. Second, these effects work through markedly different channels on different country groups: while the effects in developed economies work mostly through risk neutral rates -associated with signaling effects in the course of future monetary policy-, spillovers to emerging countries are concentrated predominantly on the term premium channel -associated with portfolio rebalancing effects. Third, these spillovers are large compared to the effects of other events, and at least as large as the effects of domestic MP in long-term rates after 2008. |
| Date: | 2015–09 |
| URL: | http://d.repec.org/n?u=RePEc:chb:bcchwp:771&r=ifn |
| By: | Boris Hofmann; Ilhyock Shim; Hyun Song Shin |
| Abstract: | Currency appreciation against the US dollar is associated with the compression of emerging market economy (EME) sovereign yields. We find that this yield compression is due to reduced risk premiums rather than expectations of interest rates already priced into forward rates. We explore a model which ties together dollar credit to EME corporates, sovereign tail risks and global investor portfolio adjustments driven by economic capital constraints. Consistent with our model, we find no empirical association between currency appreciation and sovereign spreads when we use the trade-weighted effective exchange rate that is unrelated to the US dollar. |
| Keywords: | bond spread, capital flow, credit risk, emerging market, exchange rate |
| Date: | 2016–01 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:538&r=ifn |
| By: | Hellmanzik, Christiane; Schmitz, Martin |
| Abstract: | This paper analyses international patterns of bilateral portfolio equity and debt investment in a gravity model framework. We contribute to the literature by exploring the role of virtual proximity – measured by bilateral internet hyperlinks between countries – as a novel proxy for cross-border information flows and cultural proximity more generally. Our findings show that bilateral portfolio investment is significantly affected by virtual proximity, indicating that countries which are more closely connected in terms of web content are more integrated financially. The effect is stronger for equity than for debt investment, highlighting the larger information sensitivity of equity investments, and is largest for investments among advanced economies. Moreover, including virtual proximity in estimations reduces the importance of traditionally-used proxies for information asymmetries and cultural proximity. JEL Classification: F12, F15, Z10 |
| Keywords: | cultural proximity, hyperlinks, information, international capital flows, internet, portfolio investment |
| Date: | 2016–01 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20161879&r=ifn |