nep-ifn New Economics Papers
on International Finance
Issue of 2018‒08‒13
seven papers chosen by
Vimal Balasubramaniam
University of Oxford

  1. The International Transmission of Monetary Policy By Claudia M. Buch; Matthieu Bussière; Linda Goldberg; Robert Hills
  2. Global Portfolio Rebalancing and Exchange Rates By Nelson Camanho; Harald Hau; Hélène Rey
  3. Entropy Analysis of Financial Time Series By Stephan Schwill
  4. International spillovers of quantitative easing By Kolasa, Marcin; Wesołowski, Grzegorz
  5. Foreign currency lending By Delis, Manthos; Politsidis, Panagiotis; Sarno, Lucio
  6. Time-Varying Risk Premia in Large International Equity Markets By Ines Chaieb; Hugues Langlois; O. Scaillet
  7. Bank Resolution and the Structure of Global Banks By Bolton, Patrick; Oehmke, Martin

  1. By: Claudia M. Buch; Matthieu Bussière; Linda Goldberg; Robert Hills
    Abstract: This paper presents the novel results from an internationally coordinated project by the International Banking Research Network (IBRN) on the cross-border transmission of conventional and unconventional monetary policy through banks. Teams from seventeen countries use confidential micro-banking data for the years 2000 through 2015 to explore the international transmission of monetary policies of the U.S., euro area, Japan, and United Kingdom. Two other studies use international data with different degrees of granularity. International spillovers into lending to the private sector do occur, especially for U.S. policies, and bank-specific heterogeneity influences the magnitudes of transmission. The effects are supportive of the international bank lending channel and the portfolio channel of monetary policy transmission. They also show that the frictions that banks face matter; in particular, foreign currency funding and hedging considerations can be a key source of heterogeneity. The forms of bank balance sheet heterogeneity that differentiate spillovers across banks are not uniform across countries. International spillovers into lending can be large for some banks, even while the average international spillovers of policies into nonbank lending generally are not large.
    Keywords: monetary policy, international spillovers, cross-border transmission, global bank, global financial cycle
    JEL: E52 F30 F40 G15 G21
    Date: 2018
  2. By: Nelson Camanho (Catholic University of Portugal and London School of Economics & Political Science); Harald Hau (University of Geneva, Swiss Finance Institute; Centre for Economic Policy Research (CEPR), and CESifo (Center for Economic Studies and Ifo Institute)); Hélène Rey (London Business School, Centre for Economic Policy Research (CEPR), and National Bureau of Economic Research (NBER))
    Abstract: We examine international equity allocations at the fund level and show how different returns on the foreign and domestic proportion of portfolios determine rebalancing behavior and trigger capital flows. We document the heterogeneity of rebalancing across fund types, its greater intensity under higher exchange rate volatility, and the exchange rate effect of such rebalancing. The observed dynamics of equity returns, exchange rates, and fund-level capital flows are compatible with a model of incomplete FX risk trading in which exchange rate risk partially segments international equity markets.
    Keywords: International equity funds, portfolio rebalancing, valuation effects, exchange rates
    JEL: G23 G15 G11
    Date: 2018–01
  3. By: Stephan Schwill
    Abstract: This thesis applies entropy as a model independent measure to address three research questions concerning financial time series. In the first study we apply transfer entropy to drawdowns and drawups in foreign exchange rates, to study their correlation and cross correlation. When applied to daily and hourly EUR/USD and GBP/USD exchange rates, we find evidence of dependence among the largest draws (i.e. 5% and 95% quantiles), but not as strong as the correlation between the daily returns of the same pair of FX rates. In the second study we use state space models (Hidden Markov Models) of volatility to investigate volatility spill overs between exchange rates. Among the currency pairs, the co-movement of EUR/USD and CHF/USD volatility states show the strongest observed relationship. With the use of transfer entropy, we find evidence for information flows between the volatility state series of AUD, CAD and BRL. The third study uses the entropy of S&P realised volatility in detecting changes of volatility regime in order to re-examine the theme of market volatility timing of hedge funds. A one-factor model is used, conditioned on information about the entropy of market volatility, to measure the dynamic of hedge funds equity exposure. On a cross section of around 2500 hedge funds with a focus on the US equity markets we find that, over the period from 2000 to 2014, hedge funds adjust their exposure dynamically in response to changes in volatility regime. This adds to the literature on the volatility timing behaviour of hedge fund manager, but using entropy as a model independent measure of volatility regime.
    Date: 2018–07
  4. By: Kolasa, Marcin; Wesołowski, Grzegorz
    Abstract: This paper develops a two-country model with asset market segmentation to investigate the effects of quantitative easing implemented by the major central banks on a typical small open economy that follows independent monetary policy. The model is able to replicate the key empirical facts on emerging countries’ response to large scale asset purchases conducted abroad, including inflow of capital to local sovereign bond markets and an increase in international comovement of term premia. According to our simulations, quantitative easing abroad boosts domestic demand in the small economy, but undermines its international competitiveness and depresses aggregate output, at least in the short run. This is in contrast to conventional monetary easing in the large economy, which has positive spillovers to output in other countries. We also find that limiting these spillovers might require policies that affect directly international capital flows, like imposing capital controls or mimicking quantitative easing abroad by purchasing local long-term bonds. JEL Classification: E44, E52, F41
    Keywords: bond market segmentation, international spillovers, quantitative easing, term premia
    Date: 2018–07
  5. By: Delis, Manthos; Politsidis, Panagiotis; Sarno, Lucio
    Abstract: Lending to corporates in foreign currencies can expose banks to substantial currency risk. Using global syndicated loan data, we find that a one-standard-deviation increase in exchange rate volatility increases loan spreads by approximately 20 basis points for loans made in a currency different from the lenders’. This implies excess interest of approximately USD 2.55 million for loans of average size and duration. We show that our finding is mostly attributed to credit constraints and deviations from perfect competition in international lending markets. Borrowers can lower the extra cost by forming strong lending relationships with their banks.
    Keywords: Global syndicated loans; Foreign currency lending; Exchange rate risk; Bank market power; Relationship lending
    JEL: F31 F33 F34 G21
    Date: 2018–07–26
  6. By: Ines Chaieb (University of Geneva and Swiss Finance Institute); Hugues Langlois (HEC Paris); O. Scaillet (University of Geneva and Swiss Finance Institute)
    Abstract: We use an estimation methodology tailored for large unbalanced panels of individual stock returns to address key economic questions about the factor structure, pricing performance of factor models, and time-variations in factor risk premia in international equity markets. We estimate factor models with time-varying factor exposures and risk premia at the individual stock level using 62,320 stocks in 46 countries over the 1985-2018 period. We consider market, size, value, momentum, profitability, and investment factors aggregated at the country, regional, and world level. We find that adding an excess country market factor to world or regional factors is sufficient to capture the factor structure for both developed and emerging markets. We do not reject asset pricing restriction tests for multifactor models in 74% to 91% of countries. Value and momentum premia show more variability over time and across countries than profitability and investment premia. The excess country market premium is statistically significant in many developed and emerging markets but economically larger in emerging markets.
    Keywords: large panel, approximate factor model, risk premium, international asset pricing, market integration
    JEL: C12 C13 C23 C51 C52 G12 G15
    Date: 2018–01
  7. By: Bolton, Patrick; Oehmke, Martin
    Abstract: We study the resolution of global banks by national regulators. Single-point-of-entry (SPOE) resolution, where loss-absorbing capital is shared across jurisdictions, isefficient but may not be implementable. First, when expected transfers across jurisdictions are too asymmetric, national regulators fail to set up SPOE resolution ex ante. Second, when required ex-post transfers are too large, national regulators ring-fence assets instead of cooperating in SPOE resolution. In this case, a multiple-point-of-entry (MPOE) resolution, where loss-absorbing capital is pre-assigned, is more robust. Our analysis highlights a fundamental link between efficient bank resolution and the operational structures and risks of global banks.
    Keywords: bank resolution; single point of entry
    JEL: G01 G18 G21 G33
    Date: 2018–07

This nep-ifn issue is ©2018 by Vimal Balasubramaniam. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.