nep-ifn New Economics Papers
on International Finance
Issue of 2017‒02‒19
four papers chosen by
Vimal Balasubramaniam
University of Oxford

  1. The Coming Wave: Where Do Emerging Market Investors Put Their Money? By G. Andrew Karolyi; David T. Ng; Eswar S. PrasadAuthor-Workplace-Name: Cornell University
  2. Effects of Capital Flow on the Equity and Housing Markets in Hong Kong By Yin-Wong Cheung; Kenneth K. Chow; Matthew S. Yiu
  3. Offshore Renminbi Trading: Findings from the 2013 BIS Triennial Central Bank Survey By Yin-Wong CheungAuthor-Workplace-Name: City University of Hong Kong; Matthew S. Yiu
  4. Exchange Arrangements Entering the 21st Century: Which Anchor Will Hold? By Ethan Ilzetzki; Carmen M. Reinhart; Kenneth S. Rogoff

  1. By: G. Andrew Karolyi (Cornell University); David T. Ng (Cornell University); Eswar S. PrasadAuthor-Workplace-Name: Cornell University
    Abstract: We examine how emerging market (EM) investors allocate their stock portfolios internationally. Using both country-level and institution-level data, we find that the coming wave of EM investors systematically over- or under-weight their holdings in some target countries. These abnormal foreign allocation biases of EM investors offer robust support of the information endowment hypothesis of van Nieuwerburgh and Veldkamp (2009). Specifically, past capital and trade flows from a foreign country to the home country create an information endowment (or advantage) that lead home country investments to be overweight that foreign country. At the institutional level, information advantage proxies based on relationships between EM institutional investors and the headquarters of their parent companies have strong explanatory power for international portfolio allocations. The results remain robust after controlling for other factors like geographic and other measures of economic proximity, economic and capital market development, market integration, market returns and correlation, and corporate governance. The information advantage effect is stronger for EM investors for which external portfolios exhibit a higher degree of concentration.
    Keywords: Global portfolio allocation, portfolio equity investment, institutional investors, emerging market economies
    JEL: G11 G15 F21
    Date: 2016–03
  2. By: Yin-Wong Cheung (City University of Hong Kong); Kenneth K. Chow (Hong Kong Monetary Authority); Matthew S. Yiu (Hong Kong Institute for Monetary Research)
    Abstract: The revival of strong capital flows to emerging economies in the aftermath of the Global Financial Crisis in 2008-09 has rekindled the debate on the adverse effects of excessive capital inflows. We study the effects of official and illicit capital flows on Hong Kong, which is a small and open economy with minimal restrictions on cross-border fund movements. To illustrate the effects of different types of capital flows, we study official and illicit flows on Hong Kong¡¯s equity and residential housing markets. It is found that the official and illicit capital flow measures reflect different facets of flow movements and exhibit differential effects on the equity and residential housing markets. The results highlight the complexity of managing capital flows, and the relevance of policies targeting specific sectors.
    Keywords: Capital flows, currency-based measure, illicit flow measure, equity market, real estate market
    JEL: F32 E42 G15 R30
    Date: 2017–01
  3. By: Yin-Wong CheungAuthor-Workplace-Name: City University of Hong Kong; Matthew S. Yiu (Hong Kong Institute for Monetary Research)
    Abstract: Using foreign exchange transaction data reported in the Triennial Central Bank Survey by the Bank for International Settlements, we find that offshore renminbi (RMB) trading activity is affected by both the host economy¡¯s characteristics and its link with China. For instance, the occurrence of offshore RMB trading is determined by the economy¡¯s GDP, stage of financial development and free trade agreement with China. When an economy hosts offshore RMB trading, the trading volume is affected by the size of its foreign exchange market, equity market capitalisation, as well as the bilateral link with China through foreign direct investment flows.
    Date: 2016–08
  4. By: Ethan Ilzetzki; Carmen M. Reinhart; Kenneth S. Rogoff
    Abstract: This paper provides a comprehensive history of anchor or reference currencies, exchange rate arrangements, and a new measure of foreign exchange restrictions for 194 countries and territories over 1946-2016. We find that the often-cited post-Bretton Woods transition from fixed to flexible arrangements is overstated; regimes with limited flexibility remain in the majority. Our central finding is that the US dollar scores (by a wide margin) as the world’s dominant anchor currency and, by some metrics, its use is far wider today than 70 years ago. In contrast, the global role of the euro appears to have stalled in recent years. While the incidence of capital account restrictions has been trending lower for decades, an important wave toward capital market integration dates as recently as the mid-1990s. We suggest that record accumulation of reserves post 2002 has much to do with many countries’ desire to stabilize exchange rates in an environment of markedly greater capital mobility. Indeed, the continuing desire to manage exchange rates despite increased capital mobility post-2003 may be a key factor underpinning the modern-day Triffin dilemma that some have recently pointed to.
    JEL: E50 F3 F4 N2
    Date: 2017–02

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