nep-ifn New Economics Papers
on International Finance
Issue of 2018‒04‒23
seven papers chosen by
Vimal Balasubramaniam
University of Oxford

  1. How ETFs Amplify the Global Financial Cycle in Emerging Markets By Nathan Converse; Eduardo Levy-Yeyati; Tomas Williams
  2. The Stabilizing Role of Net Foreign Asset Returns By Gustavo Adler; Daniel Garcia-Macia
  3. Capital Flow Management with Multiple Instruments By Viral V. Acharya; Arvind Krishnamurthy
  4. Capital Inflows, Equity Issuance Activity, and Corporate Investment By Charles W. Calomiris; Mauricio Larrain; Sergio L. Schmukler
  5. Foreign Safe Asset Demand and the Dollar Exchange Rate By Zhengyang Jiang; Arvind Krishnamurthy; Hanno Lustig
  6. Firms' credit risk and the onshore transmission of the global financial cycle By Ramon Moreno; José María Serena Garralda
  7. Corporate foreign bond issuance and interfirm loans in China By Yi Huang; Ugo Panizza; Richard Portes

  1. By: Nathan Converse; Eduardo Levy-Yeyati; Tomas Williams
    Abstract: Since the early 2000s exchange-traded funds (ETFs) have grown to become an important investment vehicle worldwide. In this paper, we study how their growth affects the sensitivity of international capital flows to the global financial cycle. We combine comprehensive fund level data on investor flows with a novel identification strategy that controls for unobservable time-varying economic conditions at the investment destination. For dedicated emerging market funds, we find that the sensitivity of investor flows to global risk factors for equity (bond) ETFs is 1.5 (1.25) times higher than for equity (bond) mutual funds. In turn, we show that in countries where ETFs hold a larger share of financial assets, total cross-border equity flows and prices are significantly more sensitive to global risk factors. We conclude that the growing role of ETFs as a channel for international capital flows amplifies the incidence of the global financial cycle in emerging markets.
    Keywords: Exchange-traded funds, mutual funds, global financial cycle, global risk, push and pullfactors, capital flows, emerging markets
    JEL: F32 G11 G15 G23
    Date: 2018–04–09
  2. By: Gustavo Adler; Daniel Garcia-Macia
    Abstract: With the rapid growth of countries' foreign asset and liability positions over the last two decades, financial returns on those positions ('NFA returns') have become material drivers of current accounts and net stock positions. This paper documents the relative importance of NFA return versus trade channels in driving NFA dynamics, for a sample of 52 economies over 1990-2015. While persistent trade imbalances have been a strong force leading to diverging NFA positions, NFA returns have played an important stabilizing role, mitigating NFA divergence. The stabilizing role of NFA returns primarily reflects the response of asset prices, rather than yield differentials or exchange rates. There is also evidence of heterogeneity in the speed of NFA adjustment, with emerging market economies adjusting more rapidly than advanced economies, and reserve-currency countries adjusting more slowly than others. The paper also documents the role of NFA returns as insurance against domestic and global income shocks, with a focus on reserve-currency countries.
    Date: 2018–04–06
  3. By: Viral V. Acharya; Arvind Krishnamurthy
    Abstract: We examine theoretically the role of reserves management and macro-prudential capital controls as ex-post and ex-ante safeguards, respectively, against sudden stops, and argue that these measures are complements rather than substitutes. Absent capital controls, reserves to be deployed ex post are partially undone ex ante by short-term capital flows, a form of moral hazard from the insurance provided by reserves in sudden stops. Ex ante capital controls offset this distortion and thereby increase the benefit of holding reserves. Thus, these instruments are complements. With foreign investment flows into both domestic and external borrowing markets, capital controls need to account for the possibility of regulatory arbitrage between the markets. Through the lens of the model, we analyze movements in foreign reserves, external debt, and the range of capital controls being employed by one large emerging market, viz. India.
    JEL: E44 F3 G01 G18
    Date: 2018–03
  4. By: Charles W. Calomiris; Mauricio Larrain; Sergio L. Schmukler
    Abstract: We use issuance-level data to study how equity capital inflows that enter emerging market economies affect equity issuance and corporate investment. We show that foreign inflows are strongly correlated with country-level issuance. The relation reflects the behavior of large issuers issuing in domestic equity markets and that of firms issuing in international markets. Those larger, more liquid, and highly valued firms are the ones more likely to raise equity when their country receives capital inflows. To identify supply-side shocks, we instrument capital inflows into each country with exogenous changes in other countries’ attractiveness to foreign investors. Shifts in the supply of foreign capital are important drivers of increased equity inflows. Instrumented inflows lead a subset of firms (large domestic issuers and foreign issuers) to raise new equity, which they use mainly to fund investment. Corporate investment increases between one-tenth and four-tenths the amount of foreign equity capital entering the country.
    JEL: F21 F3 F36 F41 G11 G15 G3 O16
    Date: 2018–03
  5. By: Zhengyang Jiang; Arvind Krishnamurthy; Hanno Lustig
    Abstract: We develop a theory that links foreign investors' demand for the safety of U.S. Treasury bonds to the value of the dollar in spot markets. An increase in the convenience yield that foreign investors derive from holding U.S. Treasurys induces an immediate appreciation of the US dollar and, going forward, lowers the expected return to a foreign investor from owning Treasury bonds. Under our theory, we show that the foreign convenience yield can be measured by the ‘Treasury basis,’ defined as the wedge between the yield on foreign government bonds and the currency-hedged yield on U.S. Treasury bonds. We measure the convenience yield using data from a cross-country panel going back to 1988 and the US/UK cross going back to 1970. In both datasets, regression evidence strongly supports the theory. Our results help to resolve the exchange rate disconnect puzzle: the Treasury basis variation accounts for up to 41% of the quarterly variation in the dollar. Our results also provide support for recent theories which ascribe a special role to the U.S. as a provider of world safe assets.
    JEL: G15
    Date: 2018–03
  6. By: Ramon Moreno; José María Serena Garralda
    Abstract: We investigate the role of firms' credit risk in the onshore transmission of international bond market conditions. We show that reductions in the global price of risk, measured by the excess bond premium, encourage more international bond borrowing by smaller and younger firms. Due to informational asymmetries, these firms pay a higher credit spread. Thus their funding costs, and consequently their international borrowing, are more tightly linked to the global price of risk. The funds borrowed in response to favourable market conditions cause their balance sheets to deteriorate; over a three-year horizon, leverage increases, in support of capital expenditure, and cash holdings increase. Our results reveal a micro-level link between rising global risk appetite and the gradual build-up of domestic vulnerabilities.
    Keywords: international bonds, credit risk, global risk appetite, firm-level data
    JEL: F24 F36 G15 G30
    Date: 2018–03
  7. By: Yi Huang (IHEID, Graduate Institute of International and Development Studies, Geneva); Ugo Panizza (IHEID, Graduate Institute of International and Development Studies, Geneva and CEPR); Richard Portes (London Business School, CEPR and NBER)
    Abstract: This paper uses firm-level data to document and analyze international bond issuance by Chinese non-financial corporations and the use of the proceeds of issuance. We find that dollar issuance is positively correlated with the differential between domestic and foreign interest rates. This interest rate differential increases the likelihood of dollar bond issuance by risky rms and decreases the likelihood of dollar bond issuance of exporters and profitable firms. Moreover, and most strikingly, we find that risky firms do more inter-firm lending than non-risky firms and that this lending rose significantly after the regulatory shock of 2008-09, when the authorities sought to restrict the financial activities of risky firms. Risky firms try to boost profitability by engaging in speculative activities that mimic the behavior of financial institutions while escaping prudential regulation that limits risk-taking by financial firms.
    Keywords: China, bond markets in emerging markets, carry trade, shadow banking
    JEL: F34 F32 G15 G30
    Date: 2018–04

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