nep-ifn New Economics Papers
on International Finance
Issue of 2022‒11‒07
four papers chosen by
Vimal Balasubramaniam
University of Oxford

  1. Credit Information in Earnings Calls By Harry Mamaysky; Yiwen Shen; Hongyu Wu
  2. Emerging market bond flows and exchange rate returns By Peter Hördahl; Giorgio Valente
  3. Sudden Yield Reversals and Financial Intermediation in Emerging Markets By Miguel Sarmiento
  4. LOLR policies, banks' borrowing capacities and funding structures By Corradin, Stefano; Sundaresan, Suresh

  1. By: Harry Mamaysky; Yiwen Shen; Hongyu Wu
    Abstract: We develop a novel technique to extract credit-relevant information from the text of quarterly earnings calls. This information is not spanned by fundamental or market variables and forecasts future credit spread changes. One reason for such forecastability is that our text-based measure predicts future credit spread risk and firm profitability. More firm- and call-level complexity increase the forecasting power of our measure for spread changes. Out-of-sample portfolio tests show the information in our measure is valuable for investors. Both results suggest that investors do not fully internalize the credit-relevant information contained in earnings calls.
    Date: 2022–09
  2. By: Peter Hördahl; Giorgio Valente
    Abstract: We study the relationship between international bond ows and exchange rate returns for a panel of emerging market economies (EMEs). Specifically, we investigate whether international net bond ows are correlated with subsequent changes in the value of the local currency against the US dollar. Using a portfolio approach, we find evidence of a positive relationship between bond ows and future exchange rate returns of EMEs, which is not present for advanced economy currencies. EME currencies tend to depreciate following large bond out ows, while they tend to appreciate following in ows. A dollar-neutral portfolio that goes long in in ow currencies and shorts out ow currencies earns large excess returns that are not correlated with ones from known international portfolio strategies. Moreover, using an asset pricing approach, we find strong evidence that a risk factor implied by this result is priced in the cross-section of currencies. These findings are consistent with investors requiring compensation for the risk that countries experiencing large portfolio in ows today could be facing a future tightening of their aggregate financial conditions.
    Keywords: Bond ows, exchange rate dynamics, financial conditions.
    JEL: F31 G12 G23 G24
    Date: 2022–09
  3. By: Miguel Sarmiento
    Abstract: Banks in emerging market economies rely on cross-border interbank lending to financing firms in the real sector. By matching cross-border bank-to-bank loan level data with domestic bank-to-firm loan level data, and firm-level data, this paper shows that sudden yield reversal observed during the 2013 Fed taper tantrum resulted in a substantial contraction of cross-border interbank lending in emerging markets that significantly reduced the supply of domestic corporate credit and increased the corporate loan rates. Results show that firms with an ex-ante high concentration of credit granted by exposed banks in the cross-border interbank market exhibited low bank credit and substantial real effects, including a decline in imports and exports. The results further indicate that cross-border intra-group lending and domestic unsecured interbank funding contribute to smoothing the effects of sudden yield reversals on the financial intermediation. Overall, the results are consistent with the notion that banks’ exposition in international credit markets contributes to global financial conditions’ transmission to the economy. ****RESUMEN: Los bancos en las economías de mercados emergentes dependen de los préstamos interbancarios transfronterizos para financiar empresas en el sector real. Usando datos a nivel de préstamos transfronterizos entre bancos, datos a nivel de préstamos domésticos de bancos a firmas y datos a nivel de firma, este documento muestra que la reversión repentina de rendimientos observadas durante el Fed Taper Tantrum de 2013 generó una contracción sustancial del crédito interbancario transfronterizo en los mercados emergentes que resultó en una significativa reducción de la oferta doméstica de crédito corporativo y en mayores tasas de los préstamos. Los resultados muestran que las firmas con una alta concentración de crédito otorgado por los bancos más expuestos en el mercado de préstamos interbancarios transfronterizos exhibieron bajo crédito bancario y efectos reales sustanciales, incluyendo una disminución de las importaciones y exportaciones. Los resultados indican además que los préstamos transfronterizos intra-grupo y el fondeo interbancario doméstico contribuyen a suavizar los efectos de las reversiones repentinas de rendimientos sobre la intermediación financiera. En general, estos resultados son consistentes con la noción de que la exposición de los bancos en los mercados internacionales de crédito contribuye a la transmisión de las condiciones financieras globales en la economía.
    Keywords: Sudden Yield Reversals, Cross-Border Interbank Lending, Financial Intermediation, Lending Relationships, Emerging Markets, Reversiones repentinas de rendimientos, Intermediación financiera, Mercados Emergentes, Crédito interbancario transfronterizo, Relaciones bancarias
    JEL: E43 E58 L14 G12 G21
    Date: 2022–10
  4. By: Corradin, Stefano; Sundaresan, Suresh
    Abstract: We investigate banks' benefits and costs of having access to LOLR. Integrating novel data sets we estimate the borrowing capacities of euro area banks at the ECB. Controlling for ratings, we find that banks with more fragile funding are likely to borrow more from the ECB during the great financial and euro area sovereign debt crises. We develop a dynamic model of a bank and calibrate it to our empirical estimates. A bank with access to LOLR has higher equity value and makes larger investments in new loans, but it is more leveraged, pays more dividends and issues less equity. JEL Classification: G2, E5, E58
    Keywords: borrowing capacity, collateral, haircut, liquidity, LOLR
    Date: 2022–10

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