nep-ifn New Economics Papers
on International Finance
Issue of 2020‒05‒04
five papers chosen by
Vimal Balasubramaniam
University of Oxford

  1. How ETFs Amplify the Global Financial Cycle in Emerging Markets By Nathan Converse; Eduardo Levy Yeyati; Tomás Williams
  2. Emerging market economy exchange rates and local currency bond markets amid the Covid-19 pandemic By Boris Hofmann; Ilhyock Shim; Hyun Song Shin
  3. Currency Futures' Risk Premia and Risk Factors By Kerstin Bernoth; Jürgen von Hagen; Casper G. de Vries
  4. Dollar funding costs during the Covid-19 crisis through the lens of the FX swap market By Stefan Avdjiev; Egemen Eren; Patrick McGuire
  5. When is Bad News Good News? U.S. Monetary Policy, Macroeconomic News, and Financial Conditions in Emerging Markets By Jasper Hoek; Steven B. Kamin; Emre Yoldas

  1. By: Nathan Converse; Eduardo Levy Yeyati; Tomás Williams
    Abstract: This paper examines how the growth of exchange-traded funds (ETFs) has affected the sensitivity of international capital flows to global financial conditions. Using data on individual emerging market funds worldwide, we employ a novel identification strategy that controls for unobservable time-varying economic conditions at the investment destination. We find that the sensitivity of flows to global financial conditions for equity (bond) ETFs is 2.5 (2.25) times higher than for equity (bond) mutual funds. We then show that our findings have macroeconomic implications. In countries where ETFs hold a larger share of the equity market, total cross-border equity flows and returns are significantly more sensitive to global financial conditions. Our results imply that the increasing role of ETFs as a channel for international capital flows has amplified the global financial cycle in emerging markets.
    Keywords: Exchange-traded funds; Mutual funds; Global financial cycle; Global risk; Push and pull factors; Capital flows; Emerging markets
    JEL: F32 G11 G15 G23
    Date: 2019–01–17
  2. By: Boris Hofmann; Ilhyock Shim; Hyun Song Shin
    Abstract: Borrowing through domestic currency bonds has not insulated emerging market economies (EMEs) from the financial shock unleashed by Covid-19; EME local currency bond spreads spiked amid sharp currency depreciations and capital outflows. Portfolio investors face amplified losses as local currency spreads and exchange rates move in lockstep; their revised portfolio allocations in turn strengthen this correlation. EMEs with monetary policy frameworks that are equipped to address the feedback loop between exchange rate depreciation and capital outflows stand a better chance of weathering the financial fallout from the Covid-19 pandemic. To counter large stock adjustments in domestic bond markets, EME central banks may need to expand their toolkit to take on a "dealer of last resort" role; a number of them are already moving in this direction.
    Date: 2020–04–07
  3. By: Kerstin Bernoth; Jürgen von Hagen; Casper G. de Vries
    Abstract: The use of futures exchange contracts instead of forwards completes the maturity spectrum of the correlation between the spot yield and the premium. We find that the forward premium puzzle (FFP) depends significantly on the maturity horizon of the futures contract and the choice of sampling period. The FFP appears to be a pre-crisis phenomenon and is only observed for maturities longer than about one month. When examining whether the observed excess returns of futures contracts represent a fair compensation for currency risk, we find that non-durable consumption risk and market risk can explain excess currency returns. But only in the pre-crisis period and when the maturity of the assets is longer than about three months.
    Keywords: Forward premium puzzle, uncovered interest parity, futures rates, risk premium, currency excess returns, capital asset pricing model
    JEL: F31 F37 G12 G13 G15
    Date: 2020
  4. By: Stefan Avdjiev; Egemen Eren; Patrick McGuire
    Abstract: Since the start of the Covid-19 pandemic, indicators of dollar funding costs in foreign exchange markets have risen sharply, reflecting both demand and supply factors. The demand for dollar funding has grown in recent years, reflecting the currency hedging needs of corporates and portfolio investors outside the United States. Against this backdrop, the financial turbulence of recent weeks has crimped the supply of dollar funding from financial intermediaries, sharply lifting indicators of dollar funding costs. These costs have narrowed after central banks deployed dollar swap lines, but broader policy challenges remain in ensuring that dollar funding markets remain resilient and that central bank liquidity is channelled beyond the banking system.
    Date: 2020–04–01
  5. By: Jasper Hoek; Steven B. Kamin; Emre Yoldas
    Abstract: Rises in U.S. interest rates are often thought to generate adverse spillovers to emerging market economies (EMEs). We show that what appears to be bad news for EMEs might actually be good news, or at least not-so-bad news, depending on the source of the rise in U.S. interest rates. We present evidence that higher U.S. interest rates stemming from stronger U.S. growth generate only modest spillovers, while those stemming from a more hawkish Fed policy stance or inflationary pressures can lead to significant tightening of EME financial conditions. Our identification of the sources of U.S. rate changes is based on high-frequency moves in U.S. Treasury yields and stock prices around FOMC announcements and U.S. employment report releases. We interpret positive comovements of stocks and interest rates around these events as growth shocks and negative comovements as monetary shocks, and estimate the effect of these shocks on emerging market asset prices. For economies with greater macroeconomic vulnerabilities, the difference between the impact of monetary and growth shocks is magnified. In fact, for EMEs with very low levels of vulnerability, a growth-driven rise in U.S. interest rates may even ease financial conditions in some markets.
    Keywords: Monetary policy; Spillovers; Emerging markets; Growth shock; Monetary shock; Financial conditions
    JEL: E50 F30
    Date: 2020–01–31

This nep-ifn issue is ©2020 by Vimal Balasubramaniam. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.