nep-ifn New Economics Papers
on International Finance
Issue of 2021‒06‒28
five papers chosen by
Vimal Balasubramaniam
University of Oxford

  1. Currency Hedging: Managing Cash Flow Exposure By Laura Alfaro; Mauricio Calani; Liliana Varela
  2. Exchange Rates and Asset Prices in a Global Demand System By Koijen, Ralph; Yogo, Motohiro
  3. Exchange rates and the global transmission of equity market shocks By Ojea-Ferreiro, Javier; Reboredo, Juan C.
  4. International Yield Spillovers By Don H. Kim; Marcelo Ochoa
  5. Jumpstarting an International Currency By Bahaj, Saleem; Reis, Ricardo

  1. By: Laura Alfaro; Mauricio Calani; Liliana Varela
    Abstract: Foreign currency derivative markets are among the largest in the world, yet their role in emerging markets is relatively understudied. We study firms' currency risk exposure and their hedging choices by employing a unique dataset covering the universe of FX derivatives transactions in Chile since 2005, together with firm-level information on sales, international trade, trade credits and foreign currency debt. We uncover four novel facts: (i) natural hedging of currency risk is limited, (ii) financial hedging is more likely to be used by larger firms and for larger amounts, (iii) firms in international trade are more likely to use FX derivatives to hedge their gross --not net-- cash currency risk, and (iv) firms are more likely to pay higher premiums for longer maturity contracts. We then show that financial intermediaries can affect the forward exchange rate market through a liquidity channel, by leveraging a regulatory negative supply shock that reduced firms' use of FX derivatives and increased the forward premiums.
    JEL: F31 F38 G30 G38
    Date: 2021–06
  2. By: Koijen, Ralph; Yogo, Motohiro
    Abstract: Using international holdings data, we estimate a demand system for financial assets across 36 countries. The demand system provides a unified framework for decomposing variation in exchange rates, long-term yields, and stock prices; interpreting major economic events such as the European sovereign debt crisis; and estimating the convenience yield on US assets. Macro variables and policy variables (i.e., short-term rates, debt quantities, and foreign exchange reserves) account for 55 percent of the variation in exchange rates, 57 percent of long-term yields, and 69 percent of stock prices. The average convenience yield is 2.15 percent on US long-term debt and 1.70 on US equity.
    Date: 2020–06
  3. By: Ojea-Ferreiro, Javier (European Commission); Reboredo, Juan C. (Universidade de Santiago de Compostela)
    Abstract: We assess the role played by exchange rates in buffering or amplifying the propagation of shocks across international equity markets. Using copula functions we model the joint dependence between exchange rates and two global equity markets and, from a copula framework, we obtain the conditional expectation and measure the exchange rate contribution to shock propagation between those equity markets. Our estimates for emerging Latin American economies (Argentina, Brazil, Chile and Mexico) and two developed markets (Europe and the USA) document the following: (a) the contribution of exchange rates to the transmission of equity shocks is time varying and asymmetric and differs across countries; and (b) exchange rates diversify shocks from abroad for investors based in emerging economies (particularly Brazil, Chile and Mexico) and echo the effect of shocks from abroad for investors based in developed markets. This evidence has implications for international investors in terms of portfolio and risk management decisions.
    Keywords: Exchange rates; International equity markets; Copulas; Expected shortfall
    JEL: C58 F31 G15
    Date: 2021–04
  4. By: Don H. Kim; Marcelo Ochoa
    Abstract: This paper investigates spillovers from foreign economies to the U.S. through changes in longterm Treasury yields. We document a decline in the contribution of U.S. domestic news to the variance of long-term Treasury yields and an increased importance of overnight yield changes—a rough proxy for the contribution of foreign shocks to U.S. yields—over the past decades. Using a model that identifies U.S., Euro area, and U.K. shocks that move global yields, we estimate that foreign (non-U.S.) shocks account for at least 20 percent of the daily variation in long-term U.S. yields in recent years. We argue that spillovers occur in large part through bond term premia by showing that a low level of foreign yields relative to U.S. yields predicts a decline in distant forward U.S. yields and higher returns on a strategy that is long on a long-term Treasury security and short on a long-term foreign bond.
    Keywords: Bond risk premia; Foreign spillovers; Event study; Identification by heteroskedasticity; Predictability
    JEL: E52 F37 G12 G15
    Date: 2021–01–11
  5. By: Bahaj, Saleem; Reis, Ricardo
    Abstract: Monetary and financial policies that lower the cost of credit for working capital in a currency outside of its country can provide the impetus for that currency to be used in international trade. This paper shows this in theory, by exploring the complementarity in the currency used for financing working capital and the currency used for invoicing sales. Financial policies by a central bank can jump-start the use of its currency outside a country's borders. In the data, the creation of 38 swap lines by the People's Bank of China between 2009 and 2018 provides a test of the theory. Signing a swap line with a country is significantly associated with increases in the use of the RMB in payments to and from that country in the following months.
    JEL: E44 E58 F33 F41 G15
    Date: 2020–05

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