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on International Finance |
| By: | Riccardo Colacito; Steven J. Riddiough; Lucio Sarno |
| Abstract: | We find a strong link between currency excess returns and the relative strength of the business cycle. Buying currencies of strong economies and selling currencies of weak economies generates high returns both in the cross section and time series of countries. These returns stem primarily from spot exchange rate predictability, are uncorrelated with common currency investment strategies, and cannot be understood using traditional currency risk factors in either unconditional or conditional asset pricing tests. We also show that a business cycle factor implied by our results is priced in a broad currency cross section. |
| JEL: | F31 G12 G15 |
| Date: | 2019–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:26299&r=all |
| By: | Aeimit Lakdawala (Michigan State University); Michael Bauer (Federal Reserve Bank of San Francisco); Philippe Mueller (University of Warwick) |
| Abstract: | Monetary policy announcements are surrounded by substantial uncertainty about the type, direction and magnitude of the policy action. Using a novel, market-based measure of monetary policy uncertainty we document a systematic, predictable pattern over the course of the FOMC meeting cycle: FOMC announcements lead to substantial resolution of uncertainty, which then gradually ramps up over the intermeeting period. Changes in uncertainty about the future policy path capture a distinct second dimension of monetary policy actions that is relevant for the transmission to financial markets. In particular, the Federal Reserve's forward guidance announcements affected asset prices not only by adjusting the expected policy path but also by changing market-perceived uncertainty about this path. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:1403&r=all |
| By: | Ṣebnem Kalemli-Özcan |
| Abstract: | I show that monetary policy divergence vis-a-vis the U.S. has larger spillover effects in emerging markets than advanced economies. The monetary policy of the U.S. affects domestic credit costs in other countries through its effect on global investors’ risk perceptions. Capital flows in and out of emerging market economies are particularly sensitive to fluctuations in such risk perceptions and have a direct effect on local credit spreads. Domestic monetary policy is ineffective in mitigating this effect as the pass-through of policy rate changes into short-term interest rates is imperfect. This disconnect between short rates and monetary policy rates is explained by changes in risk perceptions. A key policy implication of my findings is that emerging markets’ monetary policy actions designed to limit exchange rate volatility can be counterproductive. |
| JEL: | E0 F0 |
| Date: | 2019–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:26297&r=all |
| By: | Rosen Valchev (Boston College) |
| Abstract: | We study whether information frictions are important determinants of banks’ interna- tional portfolio holdings. Going beyond the classic distinction of home versus foreign assets, we focus on the heterogeneity within foreign holdings. First, we document that banks invest only in a few foreign countries, even when considering a class of assets that is highly homogeneous across destination countries (European sovereign bonds). Large, global banks have portfolios that are more diversified than small banks but they still overweight domestic assets relative to foreign. Second, we propose a new model with a two-tiered information cost structure – including both a fixed and a variable component – that can rationalize these facts. Finally, we test the key predictions of the model in the data. We find that more precise information leads to larger holdings, and also amplifies the effect of expected returns on portfolio holdings. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:1439&r=all |
| By: | Isha Agarwal; Grace Weishi Gu; Eswar S. Prasad |
| Abstract: | We analyze shifts in the structure of China’s capital outflows over the past decade. The composition of gross outflows has shifted from accumulation of foreign exchange reserves by the central bank to nonofficial outflows. Unlocking the enormous pool of domestic savings could have a significant impact on global financial markets as China continues to open up its capital account and as domestic investors look abroad for returns and diversification. We analyze in detail the allocation patterns of Chinese institutional investors (IIs), which constitute the main channel for foreign portfolio investment outflows. We find that, relative to benchmarks based on market capitalization, Chinese IIs underweight developed countries and high-tech sectors in their international portfolio allocations but overinvest in high-tech stocks in developed countries. To further examine Chinese IIs’ joint decisions on destination country-sector pairs, we construct continuous measures of revealed relative comparative advantage and disadvantage in a sector for a country based on trade patterns. We find that, in their foreign portfolio allocations, Chinese IIs overweight sectors in which China has a comparative disadvantage. Moreover, Chinese IIs concentrate such investments in countries that have higher relative comparative advantage in those sectors. Diversification and information advantages related to foreign imports to China seem to influence patterns of foreign portfolio allocations, while yield-seeking and learning motives do not. |
| JEL: | F2 F3 F4 |
| Date: | 2019–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:26311&r=all |