nep-ifn New Economics Papers
on International Finance
Issue of 2022‒08‒15
six papers chosen by
Vimal Balasubramaniam
University of Oxford

  1. The role of non-bank financial institutions in the intermediation of capital flows to emerging markets By Alessandro Moro; Alessandro Schiavone
  2. The Role of the Euro in Southern Neighbourhood Countries By Juan José Almagro Herrador; Mihai Macovei; Moritz Bizer
  3. Common Fund Flows: Flow Hedging and Factor Pricing By Winston Wei Dou; Leonid Kogan; Wei Wu
  4. Foreign exchange interventions and their impact on expectations: Evidence from the USD/ILS options market By Hertrich, Markus; Nathan, Daniel
  5. Good-Bye Original Sin, Hello Risk On-Off, Financial Fragility, and Crises? By Joshua Aizenman; Yothin Jinjarak; Donghyun Park; Huanhuan Zheng
  6. Cultural Origins of Investment Behavior By Andreas Ek; Gunes Gokmen; Kaveh Majlesi

  1. By: Alessandro Moro (Bank of Italy); Alessandro Schiavone (Bank of Italy)
    Abstract: This paper compares the behaviour of banks with that of non-bank financial institutions (NBFIs) in the intermediation of portfolio flows to emerging market economies (EMEs). Our analysis shows that investment funds, a key component of NBFIs, tend to reduce their exposure to EMEs more than banks during periods of financial turmoil, such as the Covid-19 pandemic. Moreover, passive funds and exchange-traded funds (ETFs) are more responsive to global shocks than active funds. Global funds show a lower elasticity to financial volatility than regional funds, while the behaviours of institutional and retail funds are quite similar. Regarding the currency composition of portfolio investments in EMEs, investment funds cut their assets denominated in USD in response to global shocks more than those in other currencies. Finally, the portfolio inflows to EMEs with a higher share of portfolio liabilities held by investment funds rather than by banks and other financial intermediaries tend to be more sensitive to the global financial cycle.
    Keywords: financial intermediation, investment funds, emerging markets, capital flows, financial crisis
    JEL: F32 F36 G11 G15 G23
    Date: 2022–04
  2. By: Juan José Almagro Herrador; Mihai Macovei; Moritz Bizer
    Abstract: This paper explores the role of the euro in the Southern neighbourhood of the EU, notably in Algeria, Egypt, Israel, Jordan, Lebanon, Libya, Morocco and Tunisia. Our analysis is based on a survey conducted by the European Commission in 2021 on the use of the euro and other currencies in these countries, as well as other relevant sources and is performed across five main dimensions: cross-border trade transactions, remittances, foreign exchange reserves, external public debt and the commercial banking sector. It finds that the use of the euro in Southern Neighbourhood countries is higher, on average, than in the world and in the EU’s Eastern Neighbours (Armenia, Azerbaijan, Belarus, Georgia, Moldova and Ukraine), although the US dollar remains the foreign currency of reference in the region. The US dollar’s continued strong role reflects historical developments and monetary arrangements, as well as the greater liquidity and dominant role of the US dollar in global financial markets. The region remains a heterogeneous group, with the euro playing a more prominent role than the US dollar in Maghreb countries (i.e. Algeria, Morocco and Tunisia). The extensive use of the euro for trade invoicing across countries seems highly correlated with the depth of economic and trade relations with euro area countries and the EU at large. Around one third of inward remittances are denominated in euro and over one third of the external public debt stock is denominated in euro on average, higher than the global average. The banking sector and foreign reserves remain heavily dollarised across countries. Based on these findings, the paper highlights new areas, such as green finance and NextGenerationEU bond issuance, which together with other policy initiatives could foster a higher use of the euro in the region.
    JEL: E41 E42 E52 E58
    Date: 2022–06
  3. By: Winston Wei Dou; Leonid Kogan; Wei Wu
    Abstract: Active equity funds care about fund size, affected by fund flows that obey a strong factor structure with the common component responding to macroeconomic shocks. Funds hedge against common flows by tilting their portfolios toward low-flow-beta stocks, while household/retail and index investors overweight high-flow-beta stocks in equilibrium. Consequently, common flows earn a risk premium, leading to a multi-factor asset-pricing model resembling the ICAPM, even with myopic agents and unsophisticated fund clients. Exploiting quasi-experiments induced by the local-natural-disaster occurrences and the unexpected trade-war announcements, we find that an increased outflow risk faced by funds leads to more aggressive flow-hedging portfolio tilts.
    JEL: G11 G12 G23
    Date: 2022–07
  4. By: Hertrich, Markus; Nathan, Daniel
    Abstract: Using confidential daily data, we analyse how the intervention episode of the Bank of Israel (BOI) from 2013 to 2019 has affected the foreign value of the Israeli new shekel (ILS) and the expectations about its future value. We find that interventions amounting to US dollar (USD) 1 billion are on average associated with a depreciation of the ILS by 0.82%-0.85%, which is at the upper bound of the estimated impact in other studies. The (indirect) effect on the forward rate is smaller - the BOI's USD purchases have widened the negative deviation from covered interest parity. The higher moments of the risk-neutral probability distribution of future exchange rates proxied by the scaled price quotes of USD/ILS options, on the contrary, are unaffected. The USD purchases simply shift the whole distribution towards higher USD/ILS values. Crash risk, for instance, is unaffected. We also find that the USD/ILS options market anticipates intervention episodes and prices them in before they occur.
    Keywords: exchange rate,expectations,central bank intervention,Israeli new shekel,reaction function
    JEL: E52 E58 E65 F31 G14 G15
    Date: 2022
  5. By: Joshua Aizenman; Yothin Jinjarak; Donghyun Park; Huanhuan Zheng
    Abstract: We analyze the sovereign bond issuance data of eight major emerging markets (EMs) - Brazil, China, India, Indonesia, Mexico, Russia, South Africa and Turkey from 1970 to 2018. Our analysis suggests that (i) EM local currency bonds tend to be smaller in size, shorter in maturity, or lower in coupon rate than foreign currency bonds; (ii) EMs are more likely to issue local-currency sovereign bonds if their currencies appreciated before the global financial crisis of 2008 (GFC); (iii) inflation-targeting monetary policy increases the likelihood of issuing local-currency debt before GFC but not after; and (iv) EMs that offer higher sovereign yields are more likely to issue local-currency bonds after GFC. Future data will allow us to test and identify structural changes associated with the COVID-19 pandemic and its aftermath.
    Date: 2022–06
  6. By: Andreas Ek (Lund University); Gunes Gokmen (Lund University); Kaveh Majlesi (Monash University, Lund University, IZA, and CEPR)
    Abstract: There are large cross-country differences in the portfolio composition of individual investors. In this paper, we study the role of cultural heritage in explaining these differences by combining data on the asset allocation of second-generation immigrants in Sweden with the cultural attributes of their parents' countries of origin. Descendants of more risk-loving and less patient cultures take more idiosyncratic risk by keeping a higher share of their financial wealth in directly held stocks. They are also less likely to delegate their equity investment, as they assign a lower share of their wealth to mutual funds. We show that these findings are not driven by the selection of migrating parents, other country of origin attributes, or individual socio-economic characteristics. Our findings also provide an alternative explanation for under-diversification and lack of delegation among many individual investors.
    Keywords: culture, cultural transmission, delegation, diversification, investment behaviour
    JEL: G11 G40 G50 G51 Z10
    Date: 2022–07

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