|
on International Finance |
| By: | Boris Hofmann; Ilhyock Shim; Hyun Song Shin |
| Abstract: | We lay out a model of risk capacity for global portfolio investors in which swings in exchange rates can affect their risk-taking capacity in a Value-at-Risk framework. Exchange rate fluctuations induce shifts in portfolio holdings of global investors, even in the absence of currency mismatches on the part of the borrowers. A currency appreciation for an emerging market borrower that is part of a broad-based appreciation of emerging market currencies leads to larger bond portfolio inflows than the equivalent appreciation in the absence of a broad-based appreciation. As such, the broad dollar index emerges as a global factor in bond portfolio flows. The empirical evidence strongly supports the predictions of the model. |
| Keywords: | bond spread, capital flow, credit risk, emerging market, exchange rate |
| JEL: | G12 G15 G23 |
| Date: | 2022–07 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:1031&r= |
| By: | Eric Tong |
| Abstract: | I study the effects of the Russo-Ukrainian war on global financial markets of 87 developed and emerging economies. The methodology builds on Rigobon and Sack (2004) that focus on the shift in volatility on days of intense war news. I find that war risk caused considerable decline in asset prices, heightened stress in the financial system, and spike in commodity prices. However, the long-term risk-free rates remain anchored, suggesting that flight-to-safety behaviour was contained and had not morphed into an exodus of capital outflows towards the safest assets in the US. Over time, I find that the effects of a single, one-off war shock are transitory, peaking in about 15 days and dissipating within the month. This clarifies that the lasting impact of the war in the real world is attributable to a stream of war shocks rather than a persistent, singular shock. In a state-dependent model, I find that nations that share borders and have strong trade ties with the belligerents and NATO member states are more affected by war shocks. In contrast, financial markets of advanced and emerging economies do not exhibit significant differences. These results may inform strategies of nations and shape future outcomes. |
| JEL: | F30 F50 G10 |
| Date: | 2022–08 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2022-48&r= |
| By: | Nicholas K. Tabor; Jeffery Y. Zhang |
| Abstract: | The benefits of cross-border financial activity are wide-ranging, from greater competition and more efficient markets to broader and more stable access to capital. During normal economic times, the official sector and private sector share an incentive to foster such cross-border financial activities. During a financial crisis, however, the short-term alignment of official- and private-sector incentives can diverge—sometimes significantly. We present a game-theoretic model of the underlying trade-offs and discuss lessons for international financial regulators, placing them in the context of the 2008 financial crisis, when challenges in cross-border cooperation both channeled and amplified financial stress. We also discuss the critical unfinished business of post-crisis regulatory measures to improve oversight of internationally active financial institutions. |
| Keywords: | Bank Capital; Bank Liquidity; Cross-Border Finance; Market Fragmentation; Pre-Positioning |
| JEL: | F02 F59 F34 F00 F36 F30 |
| Date: | 2022–08–09 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2022-51&r= |
| By: | António Afonso; José Alves; Krzysztof Beck; Karen Jackson |
| Abstract: | We consider a new dataset that provides a description of the population of financial equity flows between developed countries from 2001 to 2018. We follow the standard practice of controlling for pull and push factors as well as gravity-style variables, while also accounting for the business cycle, public debt and sovereign ratings. Our key findings are as follows: (i) equity flows are more intense between countries at the same stage of the business cycle (ii) increased equity flows to countries with a relatively lower public debt deficit as a ratio of GDP (iii) financial and macroeconomic variables are important for big equity flows, while institutional variables are important for the small flows. Overall, this new dataset provides novel evidence on the importance of the business cycle, government debt and sovereign ratings scores. |
| Keywords: | cross-country equity flows, stock market returns, panel data, quantile regression, business cycle |
| JEL: | C23 E44 F44 G15 |
| Date: | 2022 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_9872&r= |
| By: | Damir Filipović (Ecole Polytechnique Fédérale de Lausanne; Swiss Finance Institute); Markus Pelger (Stanford University - Department of Management Science & Engineering); Ye Ye (Stanford University) |
| Abstract: | We introduce a conditional factor model for the term structure of treasury bonds, which unifies non-parametric curve estimation with cross-sectional asset pricing. Our robust, flexible and easy-to-implement method learns the discount bond excess return curve directly from observed returns of treasury securities. This curve lies in a reproducing kernel Hilbert space, which is derived from economic first principles, and optimally trades off smoothness against return fitting. We show that a low dimensional factor model arises because a sparse set of basis functions spans the estimated discount bond excess return curves. The estimated factors are investable portfolios of traded assets, which replicate the full term structure and are sufficient to hedge against interest rate changes. In an extensive empirical study on U.S. Treasuries, we show that the discount bond excess return curve is well explained by four factors, which capture polynomial shapes of increasing order and are necessary to explain the term structure premium. The cash flows of coupon bonds fully explain the factor exposure, and play the same role as firm characteristics in equity modeling. In this sense, “cash flows are covariances”. We introduce a new measure for the time-varying complexity of bond markets based on the exposure to higher-order factors, and show that changes in market complexity affects the term structure premium. |
| Keywords: | Term structure of interest rates, bond returns, factor space, U.S. Treasury securities, non-parametric method, principal components, machine learning in finance, reproducing kernel Hilbert space |
| JEL: | C14 C38 C55 G12 |
| Date: | 2022–08 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp2261&r= |
| By: | Fukker, Gábor; Kaijser, Michiel; Mingarelli, Luca; Sydow, Matthias |
| Abstract: | Overlapping portfolios constitute a well-recognised source of risk, providing a channel for financial contagion induced by the market price impact of asset deleveraging. We introduce a novel method to assess the market price impact on a security-by-security basis from historical daily traded volumes and price returns. Systemic risk within the euro area financial system of banks and investment funds is then assessed by considering contagion between individual institutions’ portfolio holdings under a severe stress scenario. As a result, we show how the bias of more homogeneous estimation techniques, commonly employed for market impact, might lead to loss estimates that are more than twice as large as losses estimated with heterogeneous price impact parameters. Another new feature in this work is the application of a price-at-risk measure instead of the average market price impact to evaluate the tail risk of possible market price movements in scenarios of different severity. Our results also show that system-level losses at the tail can be three times higher than average losses using the same scenario. JEL Classification: G01, G12, G17, G23, G32 |
| Keywords: | fire sales, indirect contagion, overlapping portfolios, price impact, quantile regression |
| Date: | 2022–08 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20222692&r= |