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on International Finance |
| By: | Martijn Boermans; John Burger |
| Abstract: | We analyze how global and local factors affect portfolio allocation by euro area investors in emerging markets at the bond-level. First, cross-sectional analysis reveals a strong preference for home (Euro) currency bonds. Second, panel regressions, whether at the bond or aggregate flows level, consistently identify trade-weighted US dollar fluctuations as the most robust explanatory variable, in sharp contrast to other global factors, such as the VIX and Fed or ECB monetary policy, which have much less impact on reallocations to emerging market bonds. Our results are consistent with the notion that broad US dollar movements act as a barometer for global risk appetite, but with an important caveat: Throughout our analysis we find holdings in Euro-denominated bonds are less sensitive to global factors, which we interpret as further evidence of a home currency bias. |
| Keywords: | global risk; capital flows; global financial cycle; US dollar; foreign exchange rates; portfolio choice; emerging economies; spillovers; monetary policy; securities holdings statistics |
| JEL: | E52 F21 F3 F31 F32 G11 G15 |
| Date: | 2020–03 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:676&r=all |
| By: | Graciela L. Kaminsky; Leandro Medina; Shiyi Wang |
| Abstract: | With a novel database, we examine the evolution of capital flows to the periphery since the collapse of the Bretton Woods System in the early 1970s. We decompose capital flows into global, regional, and idiosyncratic factors. In contrast to previous findings, which mostly use data from the 2000s, we find that booms and busts in capital flows are mainly explained by regional factors and not the global factor. We then ask, what drives these regional factors. Is it the leverage cycle in the financial center? What triggers the leverage cycle in the financial center? Is it a change in global investors’ risk appetite? Or, is it a change in the demand for capital in the periphery? We link leverage in the financial center to regional capital flows and the cost of borrowing in international capital markets to answer these questions. Our estimations indicate that regional capital flows are driven by supply shocks. Interestingly, we find that the leverage in the financial center has a time-varying behavior, with a movement away from lending to the emerging periphery in the 1970s to the 1990s towards lending to the advanced periphery in the 2000s. |
| JEL: | F30 F34 F65 |
| Date: | 2020–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:26793&r=all |
| By: | Burcu Erik; Marco Jacopo Lombardi; Dubravko Mihaljek; Hyun Song Shin |
| Abstract: | The interest in how financial conditions affect real economic activity has grown since the Great Financial Crisis (GFC), not least because some of the mechanisms at play in the financial sector may have changed. We shed light on this issue by examining the empirical relationship between global Purchasing Managers' Indices, world trade and indicators of global financial conditions, with a special focus on the broad dollar index. We show that the influence of the dollar on real economic activity and global trade seems to have increased since the GFC, while that of the VIX has decreased. |
| Keywords: | financial conditions, economic activity, world trade, dollar exchange rate, bank leverage, purchasing managers' indices, nowcasting, global supply chains |
| JEL: | C5 E2 F3 F4 F6 |
| Date: | 2020–03 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:847&r=all |
| By: | Perez-Quiros, Gabriel; Rots, Eyno; Leiva-Leon, Danilo |
| Abstract: | We propose an empirical framework to measure the degree of weakness of the global economy in real-time. It relies on nonlinear factor models designed to infer recessionary episodes of heterogeneous deepness, and fitted to the largest advanced economies (U.S., Euro Area, Japan, U.K., Canada and Australia) and emerging markets (China, India, Russia, Brazil, Mexico and South Africa). Based on such inferences, we construct a Global Weakness Index that has three main features. First, it can be updated as soon as new regional data is released, as we show by measuring the economic effects of coronavirus. Second, it provides a consistent narrative of the main regional contributors of world economy's weakness. Third, it allows to perform robust risk assessments based on the probability that the level of global weakness would exceed a certain threshold of interest in every period of time. JEL Classification: E32, C22, E27 |
| Keywords: | business cycles, factor model, international, nonlinear |
| Date: | 2020–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20202381&r=all |