nep-ifn New Economics Papers
on International Finance
Issue of 2018‒09‒10
three papers chosen by
Vimal Balasubramaniam
University of Oxford

  1. Design of Macro-prudential Stress Tests By Dmitry Orlov; Andy Skrzypacz; Pavel Zryumov
  2. International Capital Market Frictions and Spillovers from Quantitative Easing By MacDonald, Margaux
  3. Searching for Yield Abroad: Risk-Taking through Foreign Investment in U.S. Bonds By John Ammer; Alexandra Tabova; Stijn Claessens

  1. By: Dmitry Orlov (University of Rochester); Andy Skrzypacz (Stanford Graduate School of Business); Pavel Zryumov (University of Rochester)
    Abstract: We study the design of macro-prudential stress tests and capital requirements. The tests provide information about correlation in banks portfolios. The regulator chooses contingent capital requirements that create a liquidity buffer in case of a fire sale. The optimal stress test discloses information partially: when systemic risk is low, capital requirements reflect full information; when systemic risk is high, the regulator pools information and requires all banks to hold precautionary liquidity. With heterogeneous banks, weak banks determine the level of transparency and strong banks are often required to hold excess capital when systemic risk is high. Moreover, dynamic disclosure and capital adjustments can improve welfare.
    Date: 2018
  2. By: MacDonald, Margaux
    Abstract: This paper analyzes the impact of large-scale, unconventional asset purchases by advanced country central banks on emerging market economies (EMEs) from 2008 to 2014. I show that there was substantial heterogeneity in the way these purchases affected EME currency, equity, and long-term sovereign bond markets. Drawing on the gravity-in-international-finance literature, I show that the degree of capital market frictions between EMEs and advanced countries is significant in explaining the observed heterogeneity in how these asset prices were affected. This result is robust to considerations of domestic monetary policy, exchange rate regime, and capital control policies in EMEs. Furthermore, I show that the size and direction of asset price movements in EMEs depended both on the type of assets purchased and on whether it was the U.S. Federal Reserve or other advanced country central banks engaging in the purchases.
    Keywords: Financial Economics
    Date: 2018–03
  3. By: John Ammer (Federal Reserve Board); Alexandra Tabova (Federal Reserve Board); Stijn Claessens (BIS)
    Abstract: The risk-taking effects of low interest rates, now prevailing in many advanced countries, (“search-for-yield”) are hard to analyze due to both a paucity of data and challenges in identification. Unique, security-level data on portfolio investment into the United States allow us to overcome both problems. Analyzing holdings of investors from 36 countries in close to 15,000 unique U.S. corporate bonds between 2003 and 2016, we show that declining home-country interest rates lead investors to shift their international bond portfolios toward riskier U.S. corporate bonds, consistent with “search-for-yield”. We estimate even stronger effects when home interest rates reach a low level, suggesting that risk-taking in securities accelerates as rates decline.
    Date: 2018

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