nep-ifn New Economics Papers
on International Finance
Issue of 2022‒11‒21
four papers chosen by
Vimal Balasubramaniam
University of Oxford

  1. Can Time-Varying Currency Risk Hedging Explain Exchange Rates? By Leonie Bräuer; Harald Hau
  2. Portfolio capital flows and the US dollar exchange rate: Viewed from the lens of time and frequency dynamics of connectedness By Mangal Goswami; Victor Pontines; Yassier Mohammed
  3. Commodity currencies revisited: The role of global commodity price uncertainty By Laurent Ferrara; Aikaterina Karadimitropoulou; Athanasios Triantafyllou; Theodora Bermpei
  4. Is Domestic Uncertainty a Local Pull Factor Driving Foreign Capital Inflows? New Cross-Country Evidence By Sangyup Choi; Gabriele Ciminelli; Davide Furceri

  1. By: Leonie Bräuer (University of Geneva; Swiss Finance Institute, Students); Harald Hau (University of Geneva - Geneva Finance Research Institute (GFRI); Swiss Finance Institute; Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute))
    Abstract: Over the last decade foreign bond portfolio positions in US dollar assets have risen above the reciprocal US investor positions in foreign currencies. In periods of increased economic uncertainty, institutional investors hedge their international bond positions, which creates a net hedging demand for dollar assets that depreciates USD rates in both the forward and spot markets. We document the time-varying nature of this net hedging demand and show how it relates to economic uncertainty and the US net foreign bond position in various currencies. Based on a parsimonious VAR model, we find that changes in FX hedging pressure can account for approximately 30% of all monthly variation in the seven most important dollar exchange rates from 2012 to 2022.
    Keywords: Exchange Rate, Hedging Channel, Institutional Investors
    JEL: E44 F31 F32 G11 G15 G23
    Date: 2022–10
  2. By: Mangal Goswami (South East Asian Central Banks (SEACEN) Research and Training Centre); Victor Pontines (South East Asian Central Banks (SEACEN) Research and Training Centre); Yassier Mohammed (South East Asian Central Banks (SEACEN) Research and Training Centre)
    Abstract: Using high-frequency, proprietary data on daily net non-resident portfolio flows to emerging markets, our study finds in the time domain connectedness framework that, to varying degrees, there is less interconnectedness in non-resident debt and equity portfolio flows to our sample of emerging market (EM) economies during normal times. In contrast, during times of uncertainty and stress, the interconnectedness of portfolio flows intensifies. This indicates the notion of asymmetry in the spillovers of these portfolio flows during periods of stress relative to normal times. More importantly, over most of the sample period, we find that shocks in the broad EM US dollar exchange rate can have important effects on these interconnections where, based on estimates of the net directional spillover index, the broad EM US dollar exchange rate is a net transmitter of shocks to debt and equity portfolio flows of the EM economies. Using the more recent frequency domain approach to connectedness, we find that the broad EM US dollar exchange rate is a net transmitter of shocks to the EM economies' debt and equity flows with the impact of such shocks hitting portfolio capital flows within at least a week to 100 days. In addition to the importance of pre-emptive prudential policy levers, efforts toward better monitoring of risks can contribute to creditors and investors in EM economies becoming more resilient to global shocks, particularly, during times of US dollar appreciations when these portfolio flows tend to reverse.
    Keywords: portfolio debt flows, portfolio equity flows, connectedness, directional spillover
    JEL: C58 F31 F41 G15
    Date: 2022–10
  3. By: Laurent Ferrara; Aikaterina Karadimitropoulou; Athanasios Triantafyllou; Theodora Bermpei
    Abstract: Exchange rates of commodity exporting countries, generally known as commodity currencies, are often considered to be driven by some specific commodity prices. In this paper, we show that the uncertainty common to a basket of commodity prices is also a significant driver of exchange rate dynamics for a panel of commodity exporting countries. In particular, a positive shock on global commodity price uncertainty leads to a short-run depreciation of the effective exchange rate in commodity currency countries, followed by a medium-term overshooting. We document that this pattern is specific to commodity currencies and is not visible on benchmark currencies like the euro or the U.S. dollar, the latter acting as a typical safe haven currency. We refer to this pattern as the “commodity uncertainty currency” property.
    Keywords: Commodity currencies, Uncertainty co-movement, Commodity prices, SVAR model
    JEL: F43 F31 C50
    Date: 2022
  4. By: Sangyup Choi; Gabriele Ciminelli; Davide Furceri
    Abstract: Theory and conventional wisdom suggest that an increase in uncertainty in one country scares away foreign investment. But, due to the limited availability of cross-country uncertainty data, empirical evidence remains scarce, and mostly confined to a limited set of countries. This paper provides a systematic analysis of how foreign capital inflows react to an increase in political and economic uncertainty, proxied using the World Uncertainty Index. We focus on bank credit, portfolio debt, and portfolio equity capital inflows into 143 countries from 51 source countries. We find that an increase in domestic uncertainty induces a substantial and persistent decrease in bank credit and portfolio debt inflows, and (to a lesser extent) in equity inflows. The effects on portfolio inflows are larger for countries with more open capital markets. We also uncover important differences in the response of portfolio inflows through actively-managed versus passive funds. The formers are similarly sensitive to changes in uncertainty that are country-specific (purely local uncertainty) and common across countries (global uncertainty), while the latter are only sensitive to global uncertainty.
    Keywords: Uncertainty, Capital flows, World Uncertainty Index, Mutual funds, ETFs, COVID-19
    JEL: F21 F32 F42
    Date: 2022–10

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