nep-ifn New Economics Papers
on International Finance
Issue of 2017‒03‒05
four papers chosen by
Vimal Balasubramaniam
University of Oxford

  1. Disaster Risk and Asset Returns : An International Perspective By Karen K. Lewis; Edith X. Liu
  2. An exchange market pressure measure for cross-country analysis. By Patnaik, Ila; Felman, Joshua; Shah, Ajay
  3. Uncertainty, Curreny Exess Returns, and Risk Reversals By Lucas F. Husted; John H. Rogers; Bo Sun
  4. Global Collateral: How Financial Innovation Drives Capital Flows and Increases Financial Instability By Ana Fostel; John Geanakoplos; Gregory Phelan

  1. By: Karen K. Lewis; Edith X. Liu
    Abstract: Recent studies have shown that disaster risk can generate asset return moments similar to those observed in the U.S. data. However, these studies have ignored the cross-country asset pricing implications of the disaster risk model. This paper shows that standard U.S.-based disaster risk model assumptions found in the literature lead to counterfactual international asset pricing implications. Given consumption pricing moments, disaster risk cannot explain the range of equity premia and government bill rates nor the high degree of equity return correlation found in the data. Moreover, the independence of disasters presumed in some studies generates counterfactually low cross-country correlations in equity markets. Alternatively, if disasters are all shared, the model generates correlations that are excessively high. We show that common and idiosyncratic components of disaster risk are needed to explain the pattern in consumption and equity co-movements.
    Keywords: Rare disaster ; Asset returns ; International correlations
    JEL: F3 F4 G1
    Date: 2017–02
  2. By: Patnaik, Ila (National Institute of Public Finance and Policy); Felman, Joshua (IMF); Shah, Ajay (National Institute of Public Finance and Policy)
    Abstract: EMP measures in the existing literature are oriented towards applications in crisis dating and prediction. We propose a modified EMP measure where cross-country comparisons are possible. This is the sum of the observed change in the exchange rate with an estimated counterfactual of the magnitude of the change in the exchange rate associated with the observed currency intervention. We construct a multi-country dataset for EMP in each month. This opens up many new research possibilities.
    Keywords: Exchange rate regime ; capital flows ; currency wars ; monetary policy ; Exchange market pressure ; Statistical system
    JEL: E52 F31 F32
    Date: 2017–02
  3. By: Lucas F. Husted; John H. Rogers; Bo Sun
    Abstract: In this paper we provide strong evidence that heightened uncertainty in the U.S. real economy or financial markets significantly raises excess returns to the currency carry trade. We posit that this works through the influence of uncertainty on global investors' risk preferences. Macro and financial uncertainty also lower foreign exchange risk reversals, an effect that is particularly strong for high interest rate portfolios. Our results are consistent with the idea that an increase in uncertainty regarding the U.S. economy or financial markets increases investors' risk aversion, which in turn drives up the expected returns and the cost of protection against crash risk in the FX market.
    Keywords: Exchange rates ; Uncovered interest parity ; Uncertainty
    JEL: F41
    Date: 2017–02
  4. By: Ana Fostel (Dept. of Economics, George Washington University); John Geanakoplos (Cowles Foundation, Yale University); Gregory Phelan (Department of Economics, Williams College)
    Abstract: We show that cross-border financial flows arise when countries differ in their abilities to use assets as collateral. Financial integration is a way of sharing scarce collateral. The ability of one country to leverage and tranche assets provides attractive financial contracts to investors in the other country, and general equilibrium effects on prices create opportunities for investors in the financially advanced country to invest abroad. Foreign demand for collateral and for collateral-backed financial promises increases the collateral value of domestic assets, and cheap foreign assets provide attractive returns to investors who do not demand collateral to issue promises. Gross global flows respond dynamically to fundamentals, exporting and amplifying financial volatility.
    Keywords: Collateral, Financial innovation, Asset prices, Capital flows, Securitized markets, Asset-backed securities, Global imbalances
    JEL: D52 D53 E32 E44 F34 F36 G01 G11 G12
    Date: 2017–02

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