nep-ifn New Economics Papers
on International Finance
Issue of 2022‒09‒26
six papers chosen by
Vimal Balasubramaniam
University of Oxford

  1. Does Political Partisanship Cross Borders? Evidence from International Capital Flows By Kempf, Elisabeth; Luo, Mancy; Schafer, Larissa; Tsoutsoura, Margarita
  2. Trade Credit and Sectoral Comovement during Recessions By Jorge Miranda-Pinto; Gang Zhang
  3. Building portfolios of sovereign securities with decreasing carbon footprints By Gong Cheng; Eric Jondeau; Benoit Mojon
  4. Information Externalities, Funding Liquidity, and Fire Sales By Levent Altinoglu; Jin-Wook Chang
  5. Monetary policy and risk-taking: evidence from China's corporate bond market By Yang, Zheyu
  6. Lending Relationships and Currency Hedging By Sérgio Leão; Rafael Schiozer; Raquel F. Oliveira; Gustavo Araujo

  1. By: Kempf, Elisabeth; Luo, Mancy; Schafer, Larissa; Tsoutsoura, Margarita
    Abstract: Does partisan perception shape the flow of international capital? We provide evidence from two settings, syndicated corporate loans and equity mutual funds, to show ideological alignment with foreign governments affects the cross-border capital allocation by U.S. institutional investors. Our empirical strategy ensures direct economic effects of foreign elections or government ties between countries are not driving the result. Ideological alignment with foreign countries may also affect capital allocation of non-U.S. investors and can explain patterns in bilateral investment. Combined, our findings imply partisan perception is a global phenomenon and its economic effects transcend national borders.
    Date: 2022
  2. By: Jorge Miranda-Pinto; Gang Zhang
    Abstract: We show that sectoral comovement did not change for any post-war US recession, with the only exception of the Great Recession. Using sector-level and firm-level data, we argue that this large increase was driven mainly by the endogenous response of firm-to-firm credit (trade credit). We then develop a multisector model with inputoutput linkages, financial frictions, and endogenous supply of trade credit and show that the financial shocks after Lehman Brothers’ collapse triggered a response of trade credit that can qualitatively and quantitatively account for the large shift in comovement. A model with fixed trade-credit, subject to the same productivity and financial shocks, generates no increase in comovement and implies a 20% smaller decline in GDP than in the endogenous case. In contrast, we show that trade credit in the other previous recessions acted as a cushion that mitigated negative sectoral spillovers.
    Date: 2022–08
  3. By: Gong Cheng; Eric Jondeau; Benoit Mojon
    Abstract: We propose a strategy to build portfolios of sovereign securities with progressively declining carbon footprints. Passive investors could use it as a new Paris-consistent benchmark to construct a "net zero" (NZ) portfolio while tracking closely the risk-adjusted returns of a business-as-usual (BAU) benchmark. Our strategy rewards sovereign issuers that have made stronger efforts in reducing carbon intensity, measured by total domestic emissions per capita. The NZ portfolio would have reduced carbon intensity by 41% between 2014 and 2019, by assigning higher weights to countries that have had lower carbon emissions. Among advanced economies, rebalancing leads to raising shares of France, Italy and Spain in the portfolio at the expense of the United States. And among emerging market economies, this leads to higher shares for Chile, the Philippines and Romania at the expense of China. Importantly, the NZ portfolio retains the same creditworthiness as the BAU benchmark without entailing materially higher foreign exchange risks.
    Keywords: carbon footprints, sovereign debt, portfolio rebalancing, portfolio optimisation, active share, tracking error
    JEL: G11 G24 Q56
    Date: 2022–09
  4. By: Levent Altinoglu; Jin-Wook Chang
    Abstract: We develop a theory of learning in a model of fire sales and collateralized debt to study how beliefs about fundamentals are shaped by market conditions. Agents exchange short-term debt contracts to invest in a long-term risky asset, and receive shocks to the opportunity cost of funds (cost shocks) and news about the fundamental of the asset, both of which are private information. Asset prices play a dual role of clearing markets and conveying agents' private information, but markets are informationally inefficient: Agents can partially, but never fully, infer their counterparties' private information from asset prices. The informational inefficiency of markets is more acute when liquidity conditions are especially tight or loose, as this impairs ability of prices to reveal private information about fundamentals. As a result, beliefs about fundamentals are shaped endogenously by cost shocks which are orthogonal to fundamentals, leading to socially costly booms and busts in asset prices. The equilibrium is constrained inefficient due to an information externality in which agents do not internalize how their choices affect the information set of other agents. Interventions in funding markets can stabilize asset prices by altering perceptions of risk.
    Keywords: Beliefs; Learning; Fire sales; Liquidity; Asset prices; Information asymmetry
    JEL: D52 D53 E44 G28
    Date: 2022–08–15
  5. By: Yang, Zheyu
    Abstract: I study the effects of monetary policy shocks on corporate bond prices in China. Using high-frequency comovement of interest rates and stock prices surprises around People’s Bank of China’s (PBoC) policy announcements on Reserve Requirements and a Bayesian structural vector autoregression, I disentangle the true monetary policy shocks from the central bank’s informational surprises. This paper documents a strong positive effect of monetary easings shocks on secondary market bond prices. More importantly, it shows that the effect is increasing with the credit risks of the bonds, i.e., risky bonds outperform safer bonds following monetary easings while underperform following monetary tightening, which is consistent with search for yield. The findings raise implications for financial stability and macroprudential policy.
    Keywords: risk-taking,monetary policy,asset price,China
    JEL: C11 E43 E52 G12
    Date: 2022
  6. By: Sérgio Leão; Rafael Schiozer; Raquel F. Oliveira; Gustavo Araujo
    Abstract: Firms’ currency exposure may result in financial distress and trigger macroeconomic instability. Such exposure can be hedged using currency over-the-counter derivatives. We investigate whether and how lending relationships affect the access to these derivatives using novel loan and derivatives microdata. We document that firms are more likely to buy derivatives from one of their lenders than from a non-lending bank. We also find that prices are lower for derivatives provided by the main lender. These results are stronger among small firms. Our findings are consistent with lending relationships mitigating information asymmetries and derivatives reducing a bank’s loan portfolio risk.
    Date: 2022–08

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