nep-ifn New Economics Papers
on International Finance
Issue of 2018‒01‒22
seven papers chosen by
Vimal Balasubramaniam
University of Oxford

  1. International Credit Supply Shocks By Cesa-Bianchi, Ambrogio; Ferrero, Andrea; Rebucci, Alessandro
  2. When is foreign exchange intervention effective? Evidence from 33 countries By Fratzscher, Marcel; Gloede, Oliver; Menkhoff, Lukas; Sarno, Lucio; Stoerh, Tobias
  3. Unconventional monetary policy and the portfolio choice of international mutual funds By Cenedese, Gino; Elard, Ilaf
  4. Foreign booms, domestic busts: The global dimension of banking crises By Cesa-Bianchi, Ambrogio; Martin, Fernando Eguren; Thwaites, Gregory
  5. Are international banks different? Evidence on bank performance and strategy By Bertay, Ata Can; Demirguc-Kunt, Asli; Huizinga, Harry
  6. Asset Co-movements: Features and Challenges By Gospodinov, Nikolay
  7. News and narratives in financial systems: exploiting big data for systemic risk assessment By Nyman, Rickard; Kapadia, Sujit; Tuckett, David; Gregory, David; Ormerod, Paul; Smith, Robert

  1. By: Cesa-Bianchi, Ambrogio; Ferrero, Andrea; Rebucci, Alessandro
    Abstract: House prices and exchange rates can potentially amplify the expansionary effect of capital inflows by inflating the value of collateral. We first set up a model of collateralized borrowing in domestic and foreign currency with international financial intermediation in which a change in leverage of global intermediaries leads to an international credit supply increase. In this environment, we illustrate how house price increases and exchange rates appreciations contribute to fueling the boom by inflating the value of collateral. We then document empirically, in a Panel VAR model for 50 advanced and emerging countries estimated with quarterly data from 1985 to 2012, that an increase in the leverage of US Broker-Dealers also leads to an increase in cross-border credit flows, a house price and consumption boom, a real exchange rate appreciation and a current account deterioration consistent with the transmission in the model. Finally, we study the sensitivity of the consumption and asset price response to such a shock and show that country differences are associated with the level of the maximum loan-to-value ratio and the share of foreign currency denominated credit.
    Keywords: Capital Flows; Credit Supply Shock; Cross-border claims; Exchange Rates; House Prices; International Financial Intermediation.; leverage
    JEL: C32 E44 F44
    Date: 2017–12
  2. By: Fratzscher, Marcel; Gloede, Oliver; Menkhoff, Lukas; Sarno, Lucio; Stoerh, Tobias
    Abstract: This paper examines foreign exchange intervention based on novel daily data covering 33 countries from 1995 to 2011. We find that intervention is widely used and an effective policy tool, with a success rate in excess of 80 percent under some criteria. The policy works well in terms of smoothing the path of exchange rates, and in stabilizing the exchange rate in countries with narrow band regimes. Moving the level of the exchange rate in flexible regimes requires that some conditions are met, including the use of large volumes and that intervention is made public and supported via communication.
    Keywords: Foreign exchange intervention; exchange rate regimes; effectiveness measures; communication.
    JEL: E58 F31 F33
    Date: 2017–12
  3. By: Cenedese, Gino (Bank of England); Elard, Ilaf (Shanghai University of International Business and Economics)
    Abstract: Unconventional monetary policy (UMP) by the US Federal Reserve, Bank of England, Bank of Japan, and European Central Bank affects the geographical portfolio choice of international mutual fund managers. UMP prompts managers of mutual funds to rebalance their portfolios away from the country conducting UMP, and increase their geographical allocation to other developed markets; there is little evidence of rebalancing towards emerging markets. The international spillover effects from UMP announcement surprises are of small economic magnitude, in contrast to the effects of actual UMP operations in the form of large-scale asset purchases (LSAPs). The results imply that while not contributing to QE-induced capital flows to emerging markets, mutual fund managers play a role in the transmission of unconventional monetary policy, in particular LSAPs, across developed markets.
    Keywords: Unconventional monetary policy; portfolio rebalancing; international spillovers; asset allocation; mutual funds
    JEL: F30 G11 G15 G23
    Date: 2018–01–18
  4. By: Cesa-Bianchi, Ambrogio; Martin, Fernando Eguren; Thwaites, Gregory
    Abstract: This paper provides novel empirical evidence showing that foreign financial developments are a powerful predictor of domestic banking crises. Using a new data set for 38 advanced and emerging economies over 1970-2011, we show that credit growth in the rest of the world has a large positive effect on the probability of banking crises taking place at home, even when controlling for domestic credit growth. Our results suggest that this effect is larger for financially open economies, and is consistent with transmission via cross-border capital flows and market sentiment. Direct contagion from foreign crises plays an important role, but does not account for the whole effect.
    Keywords: Financial Crises; Global Credit Cycle; Banking; Financial Stability; Sentiment.
    JEL: E32 E44 E52
    Date: 2017–01–24
  5. By: Bertay, Ata Can; Demirguc-Kunt, Asli; Huizinga, Harry
    Abstract: This paper provides evidence on how bank performance and strategies vary with the degree of bank internationalization using data for 113 countries over the 2000-2015 period. We investigate if international banks headquartered in developing countries behave and perform differently than those headquartered in high-income countries. Results show that compared to domestic banks, international banks have lower valuations and achieve lower returns on equity in general. This suggests on average bank internationalization has progressed beyond the point where it is in the interest of bank shareholders, potentially because of corporate governance failures and too-big-to-fail subsidies that accrue to large and complex banks. In contrast, developing country international banks seem to have benefited from internationalization compared to their high-income counterparts. Furthermore, for international banks headquartered in developing countries, bank internationalization reduces the cyclicality of their domestic credit growth with respect to domestic GDP growth, smoothing out local downturns. In contrast, if the international bank is from a high-income country investing in a developing country, its lending is relatively procyclical, which can be destabilizing.
    Keywords: Bank internationalization; procyclicality; risk-taking; south-south banking
    JEL: F36 G21 G28
    Date: 2017–12
  6. By: Gospodinov, Nikolay (Federal Reserve Bank of Atlanta)
    Abstract: This paper documents and characterizes the time-varying structure of U.S. and international asset co-movements. Although some of the time variation could be genuine, the sampling uncertainty and time series properties of the series can distort significantly the underlying signal dynamics. We discuss examples that illustrate the pitfalls from drawing conclusions from local trends of asset prices. On a more constructive side, we find that the U.S. main asset classes and major international stock indices share a factor that is closely related to the business cycle. At even lower frequency, the common asset co-movement appears to be driven by demographic trends.
    Keywords: cross-asset; within-asset and international asset co-movements; rolling correlation; time-variability; persistence; higher moments; risk factors; sampling frequency
    JEL: G13 G14 G17
    Date: 2017–11–01
  7. By: Nyman, Rickard (University College London, Centre for the Study of Decision-Making Uncertainty); Kapadia, Sujit (Bank of England); Tuckett, David (University College London, Centre for the Study of Decision-Making Uncertainty); Gregory, David (Bank of England); Ormerod, Paul (University College London, Centre for the Study of Decision-Making Uncertainty); Smith, Robert (University College London, Centre for the Study of Decision-Making Uncertainty)
    Abstract: This paper applies algorithmic analysis to large amounts of financial market text-based data to assess how narratives and sentiment play a role in driving developments in the financial system. We find that changes in the emotional content in market narratives are highly correlated across data sources. They show clearly the formation (and subsequent collapse) of very high levels of sentiment — high excitement relative to anxiety — prior to the global financial crisis. Our metrics also have predictive power for other commonly used measures of sentiment and volatility and appear to influence economic and financial variables. And we develop a new methodology that attempts to capture the emergence of narrative topic consensus which gives an intuitive representation of increasing homogeneity of beliefs prior to the crisis. With increasing consensus around narratives high in excitement and lacking anxiety likely to be an important warning sign of impending financial system distress, the quantitative metrics we develop may complement other indicators and analysis in helping to gauge systemic risk.
    Keywords: Systemic risk; text mining; big data; sentiment; uncertainty; narratives; forecasting; early warning indicators
    JEL: C53 D83 E32 G01 G17
    Date: 2018–01–05

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