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on International Finance |
| By: | Sokol, Andrej; Eguren-Martin, Fernando |
| Abstract: | We document how the distribution of exchange rate returns responds to changes in global financial conditions. We measure global financial conditions as the common component of country-specific financial condition indices, computed consistently across a large panel of developed and emerging economies. Based on quantile regression results, we provide a characterisation and ranking of the tail behaviour of a large sample of currencies in response to a tightening of global financial conditions, corroborating (and quantifying) some of the prevailing narratives about safe haven and risky currencies. Our approach delivers a more nuanced picture than one based on standard OLS regression. We then carry out a portfolio sorting exercise to identify the macroeconomic fundamentals associated with such different tail behaviour, and find that currency portfolios sorted on the basis of net foreign asset positions, relative interest rates, current account balances and levels of international reserves display a higher likelihood of large losses in response to a tightening of global financial conditions. JEL Classification: F31, G15 |
| Keywords: | exchange rates, financial conditions indices, global financial cycle, quantile regression, tail risks |
| Date: | 2020–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20202387&r=all |
| By: | Lakdawala, Aeimit (Michigan State University, Department of Economics); Moreland, Timothy (Michigan State University, Department of Economics); Schaffer, Matthew (UNC Greensboro) |
| Abstract: | An extensive literature studies the international transmission of US monetary policy surprises (shifts in expected path of the policy rate). In this paper we show that changes in uncertainty around the expected path constitute an important additional dimension of spillover effects to global bond yields. In advanced countries, it is the term premium component of yields that responds to uncertainty. We find that this can be explained by an international portfolio balance mechanism. In contrast, for emerging countries it is the expected component of yields that reacts to uncertainty. This can be rationalized from a flight to safety channel. We find heterogeneity in the country-level response to uncertainty only in emerging economies and it is driven by the degree of financial openness. Finally, equity markets in both advanced and emerging countries also respond to US monetary policy uncertainty, but only since the financial crisis. |
| Keywords: | monetary policy uncertainty; international spillover; international portfolio balance; flight to safety |
| JEL: | E43 E58 G12 G15 |
| Date: | 2020–04–17 |
| URL: | http://d.repec.org/n?u=RePEc:ris:msuecw:2020_008&r=all |
| By: | Fidora, Michael; Schmitz, Martin; Bergant, Katharina |
| Abstract: | We analyse euro area investors' portfolio rebalancing during the ECB's Asset Purchase Programme at the security level. Based on net transactions of domestic and foreign securities, we observe euro area sectors' capital flows into individual securities, cleaned from valuation effects. Our empirical analysis – which accounts for security-level characteristics – shows that euro area investors (in particular investment funds and households) actively rebalanced away from securities targeted under the Public Sector Purchase Programme and other euro-denominated debt securities, towards foreign debt instruments, including ‘closest substitutes’, i.e. certain sovereign debt securities issued by non-euro area advanced countries. This rebalancing was particularly strong during the first six quarters of the programme. Our analysis also reveals marked differences across sectors as well as country groups within the euro area, suggesting that quantitative easing has induced heterogeneous portfolio shifts. JEL Classification: F21, F42, E52, G15 |
| Keywords: | capital flows, international investment patterns, investor heterogeneity, quantitative easing, sovereign debt |
| Date: | 2020–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20202388&r=all |
| By: | Michael Bailey; Abhinav Gupta; Sebastian Hillenbrand; Theresa Kuchler; Robert J. Richmond; Johannes Stroebel |
| Abstract: | We use anonymized data from Facebook to construct a new measure of the pairwise social connectedness between 180 countries and 332 European regions. We find that two countries trade more with each other when they are more socially connected and when they share social connections with a similar set of other countries. The social connections that determine trade in each product are those between the regions where the product is produced in the exporting country and those where it is used in the importing country. Once we control for social connectedness, the estimated effect of geographic distance on trade declines substantially, and the effect of country borders disappears. Our findings suggest that social connectedness increases trade by reducing information asymmetries and by providing a substitute for both trust and formal mechanisms of contract enforcement. We also present evidence against omitted variables and reverse causality as alternative explanations for the observed relationships between social connectedness and trade flows. |
| JEL: | F1 F6 G0 |
| Date: | 2020–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:26960&r=all |