nep-ifn New Economics Papers
on International Finance
Issue of 2022‒01‒24
three papers chosen by
Vimal Balasubramaniam
University of Oxford

  1. What types of capital flows help improve international risk sharing? By Ergys Islamaj; M. Ayhan Kose
  2. Central bank swap lines: evidence on the effects of the lender of last resort By Bahaj, Saleem; Reis, Ricardo
  3. Market efficiency in the age of big data By Martin, Ian W.R.; Nagel, Stefan

  1. By: Ergys Islamaj; M. Ayhan Kose
    Abstract: Cross-border capital flows are expected to lead to increased international risk sharing by facilitating borrowing and lending in global financial markets. This paper examines risk-sharing outcomes of various types of capital flows (foreign direct investment, portfolio equity, debt, remittance, and aid flows) in a large sample of emerging market and developing economies. The results suggest that remittances and aid flows are associated with increased international risk sharing. Other types of capital flows are not consistently correlated with better risk-sharing outcomes. These findings are robust to the use of different econometric specifications, country-specific characteristics, and other controls.
    Keywords: capital flows, remittances, aid flows, international risk sharing
    JEL: E1 F02 F4 G01
    Date: 2021–11
  2. By: Bahaj, Saleem; Reis, Ricardo
    Abstract: Theory predicts that central-bank lending programs put ceilings on private domestic lending rates, reduce ex post financing risk, and encourage ex ante investment. This paper shows that with global banks and integrated financial markets, but domestic central banks, then lending of last resort can be achieved using swap lines. Through them, a source central bank provides source-currency credit to recipient-country banks using the recipient central bank as the monitor and as the bearer of the credit risk. In theory, the swap lines should put a ceiling on deviations from covered interest parity, lower average ex post bank borrowing costs, and increase ex ante inflows from recipient-country banks into privately-issued assets denominated in the source-country’s currency. Empirically, these three predictions are tested using variation in the terms of the swap line over time, variation in the central banks that have access to the swap line, variation on the days of the week in which the swap line is open, variation in the exposure of different securities to foreign investment, and variation in banks’ exposure to dollar funding risk. The evidence suggests that the international lender of last resort is very effective.
    Keywords: liquidity facilities; currency basis; bond portfolio flows; 682288
    JEL: E44 F33 G15
    Date: 2021–11–08
  3. By: Martin, Ian W.R.; Nagel, Stefan
    Abstract: Modern investors face a high-dimensional prediction problem: thousands of observable variables are potentially relevant for forecasting. We reassess the conventional wisdom on market efficiency in light of this fact. In our equilibrium model, N assets have cash flows that are linear in J characteristics, with unknown coefficients. Risk-neutral Bayesian investors learn these coefficients and determine market prices. If J and N are comparable in size, returns are cross-sectionally predictable ex post. In-sample tests of market efficiency reject the no-predictability null with high probability, even though investors use information optimally in real time. In contrast, out-of-sample tests retain their economic meaning.
    Keywords: Bayesian learning; high-dimensional prediction problems; return predictability; out-of-sample tests; Starting Grant 639744; Center for Research in Security Prices
    JEL: G14 G12 C11
    Date: 2021–11–27

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