nep-ifn New Economics Papers
on International Finance
Issue of 2019‒06‒10
three papers chosen by
Vimal Balasubramaniam
University of Oxford

  1. Cross-border effects of prudential regulation: evidence from the euro area By Żochowski, Dawid; Franch, Fabio; Nocciola, Luca
  2. Institutional quality and cross-border asset trade: are banks less worried about diversification abroad? By Eleonora Cavallaro; Eleonora Cutrini
  3. Trading and arbitrage in cryptocurrency markets By Makarov, Igor; Schoar, Antoinette

  1. By: Żochowski, Dawid; Franch, Fabio; Nocciola, Luca
    Abstract: We analyse the cross-border propagation of prudential regulation in the euro area. Using the Prudential Instruments Database (Cerutti et al., 2017b) and a unique confidential database on balance sheets items of euro-area financial institutions we estimate panel models for 248 banks from 16 euro-area countries. We find that domestic banks reduce lending after the tightening of capital requirements in other countries, while they increase lending when loan-to-value (LTV) limits or reserve requirements are tightened abroad. We also find that foreign affiliates increase lending following the tightening of sector-specific capital buffers in the countries where their parent banks reside and that bank size and liquidity play a role in determining the magnitude of cross-border spillovers. JEL Classification: G21, F34, F36
    Keywords: cross-border spillovers, international banking, prudential policy
    Date: 2019–05
  2. By: Eleonora Cavallaro; Eleonora Cutrini
    Abstract: We build a model of cross-border asset trade where countries’ institutional quality impacts on the expected returns of the assets, and investors’ sensitivity to quality varies with their financial stress condition. Changes in “perceived quality†influence the portfolio allocation decisions and the patterns of international financial flows over time. We run econometric estimations for cross-border bank flows from advanced to emerging economies, over the period 2005-2014. We find that deteriorating conditions in financial markets, before the crisis, lead to higher demand for institutional quality. A strong regulatory environment is perceived as a protection against adverse future losses, and countries with goods institutions are less exposed to capital retrenchment. In the aftermath of the crisis, the liquidity easing in advanced economies drives down concerns for EMEs' developments, boosting flows and challenging EMEs' ability to use capital controls to mitigate unbridled flows.
    Keywords: Asset trade; Distance, quality; International financial flows; Emerging markets; Economic integration
    JEL: F12 F3 F4 G1 O5
    Date: 2018–12
  3. By: Makarov, Igor; Schoar, Antoinette
    Abstract: Cryptocurrency markets exhibit periods of large, recurrent arbitrage opportunities across exchanges. These price deviations are much larger across than within countries, and smaller between cryptocurrencies, highlighting the importance of capital controls for the movement of arbitrage capital. Price deviations across countries co-move and open up in times of large bitcoin appreciation. Countries with higher bitcoin premia over the US bitcoin price see widening arbitrage deviations when bitcoin appreciates. Finally, we decompose signed volume on each exchange into a common and an id- iosyncratic component. The common component explains 80% of bitcoin returns. The idiosyncratic components help explain arbitrage spreads between exchanges.
    Keywords: cryptocurrencies; bitcoin; arbitrage; price impact; capital controls
    JEL: F3 G3
    Date: 2019

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