nep-ifn New Economics Papers
on International Finance
Issue of 2017‒07‒16
two papers chosen by
Vimal Balasubramaniam
University of Oxford

  1. The Shifting Drivers of Global Liquidity By Stefan Avdjiev; Leonardo Gambacorta; Linda S. Goldberg; Stefano Schiaffi
  2. Investing in the Presence of Massive Flows: The Case of MSCI Country Reclassifications By Terence C. Burnham; Harry Gakidis; Jeffrey Wurgler

  1. By: Stefan Avdjiev; Leonardo Gambacorta; Linda S. Goldberg; Stefano Schiaffi
    Abstract: The post-crisis period has seen a considerable shift in the composition and drivers of international bank lending and international bond issuance, the two main components of global liquidity. The sensitivity of both types of flow to US monetary policy rose substantially in the immediate aftermath of the Global Financial Crisis, peaked around the time of the 2013 Fed “taper tantrum”, and then partially reverted towards pre-crisis levels. Conversely, the responsiveness of international bank lending to global risk conditions declined considerably post-crisis and became similar to that of international debt securities. The increased sensitivity of international bank flows to US monetary policy has been driven mainly by post-crisis changes in the behaviour of national lending banking systems, especially those that ex ante had less well capitalized banks. By contrast, the post-crisis fall in the sensitivity of international bank lending to global risk was mainly due to a compositional effect, driven by increases in the lending market shares of better-capitalized national banking systems. The post-2013 reversal in the sensitivities to US monetary policy partially reflects the expected divergence of the monetary policy of the US and other advanced economies, highlighting the sensitivity of capital flows to the degree of commonality of cycles and the stance of policy. Moreover, global liquidity fluctuations have largely been driven by policy initiatives in creditor countries. Policies and prudential instruments that reinforced lending banks’ capitalization and stable funding levels reduced the volatility of international lending flows.
    JEL: F34 G10 G21
    Date: 2017–06
  2. By: Terence C. Burnham; Harry Gakidis; Jeffrey Wurgler
    Abstract: Almost $10 trillion is benchmarked to Morgan Stanley Capital International’s Developed, Emerging, Frontier, and standalone market indexes. Reclassifications from one index to another require thousands of investors to decide how to react. We study a comprehensive sample of past reclassifications to inform this decision. On average, reclassified markets’ prices substantially overshoot between the announcement and effective dates—prices fall when a market moves from an index with more benchmarked ownership to one with less, such from Emerging to Frontier, and vice-versa—but largely revert within a year. We identify alpha-maximizing responses to reclassifications for both benchmarked and more flexible investors.
    JEL: G11 G12 G14
    Date: 2017–06

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