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on International Finance |
| By: | Maria Sole Pagliari; Swarnali Ahmed Hannan |
| Abstract: | Capital flow volatility is a concern for macroeconomic and financial stability. Nonetheless, literature is scarce in this topic. Our paper sheds light on this issue in two dimensions. First, using quarterly data for 65 countries over the period 1970Q1-2016Q1, we construct three measures of volatility, for total capital flows and key instruments. Second, we perform panel regressions to understand the determinants of volatility. The measures show that the volatility of all instruments is prone to bouts, rising sharply during global shocks like the taper tantrum episode. Capital flow volatility thus remains a challenge for policy makers. The regression results suggest that push factors can be more important than pull factors in explaining volatility, illustrating that the characteristics of volatility can be different from those of the flows levels. |
| Keywords: | Financial integration;Volatility Estimation, International Flows, Financial, Estimation, Models with Panel Data, Financial Econometrics, Financial Aspects of Economic Integration, International Business Cycles |
| Date: | 2017–03–07 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:17/41&r=ifn |
| By: | Faia, Ester; Ottaviano, Gianmarco; Sanchez Arjona, Irene |
| Abstract: | We exploit an original dataset on 15 European banks classified as G-SIBs by the BIS to assess whether expansion in foreign markets increases their riskiness, and through which channels that eventually happens. We find that there is a strong negative correlation between bank risk (proxied with CDS price or loan loss provisions) and foreign expansion. The same is true when using systemic risk metrics (marginal expected shortfalls or CoVaR). On the one hand, banks that expand abroad more have lower riskiness so that, given individual bank riskiness, their expansion reduces the (weighted) average riskiness of the banks' pool. On the other hand, foreign expansion of any given bank makes the bank and thus the banks' pool less risky. In terms of the channels, diversification, competition and regulation are all important. Expansion in destination countries with different business cycle co-movement and with stricter regulations than the origin country decreases a bank's riskiness. As for competition, expansion decreases riskiness only when competition in the origin country is less intense than in the destination countries. |
| Keywords: | banks’ risk; Competition; Diversification; global expansion; regulation.; systemic risk |
| Date: | 2017–04 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:11951&r=ifn |
| By: | Amador, Manuel; Bianchi, Javier; Bocola, Luigi; Perri, Fabrizio |
| Abstract: | We study how a monetary authority pursues an exchange rate objective in an environment that features a zero lower bound (ZLB) constraint on nominal interest rates and limits to international arbitrage. If the nominal interest rate that is consistent with interest rate parity is positive, the central bank can achieve it exchange rate objective by choosing that interest rate, a well-known result in international finance. However, if the rate consistent with parity is negative, pursuing an exchange rate objective necessarily results in zero nominal interest rates, deviations from parity, capital inflows, and welfare costs associated with the accumulation of foreign reserves by the central bank. In this latter case, all changes in external conditions that increase inflows of capital toward the country are detrimental, while policies such as negative nominal interest rates or capital controls can reduce the costs associated with an exchange rate policy. We provide a simple way of measuring these costs, and present empirical support for the key implications of our framework: when interest rates are close to zero, violations in covered interest parity are more likely, and those violations are associated with reserve accumulation by central banks. |
| Keywords: | Capital Flows; CIP Deviations; Currency Pegs; Foreign Exchange Interventions; International Reserves; Negative Interest Rates |
| JEL: | F31 F32 F41 |
| Date: | 2017–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:11928&r=ifn |
| By: | Christian Brownlees; Robert Engle |
| Abstract: | We introduce SRISK to measure the systemic risk contribution of a financial firm. SRISK measures the capital shortfall of a firm conditional on a severe market decline, and is a function of its size, leverage and risk. We use the measure to study top US financial institutions in the recent financial crisis. SRISK delivers useful rankings of systemic institutions at various stages of the crisis and identifies Fannie Mae, Freddie Mac, Morgan Stanley, Bear Stearns and Lehman Brothers as top contributors as early as 2005-Q1. Moreover, aggregate SRISK provides early warning signals of distress in indicators of real activity. JEL Classification: C22, C23, C53, G01, G20Keywords: Systemic Risk Measurement, Great Financial Crisis, GARCH, DCC |
| Date: | 2017–03 |
| URL: | http://d.repec.org/n?u=RePEc:srk:srkwps:201737&r=ifn |