nep-ifn New Economics Papers
on International Finance
Issue of 2023‒01‒23
five papers chosen by
Vimal Balasubramaniam
University of Oxford

  1. Central Banks as Dollar Lenders of Last Resort: Implications for Regulation and Reserve Holdings By Mitali Das; Gita Gopinath; Taehoon Kim; Jeremy C. Stein
  2. Non-Fundamental Flows and Foreign Exchange Rates By Felipe E. Aldunate; Zhi Da; Borja Larrain; Clemens Sialm
  3. Co-movement and global factors in sovereign bond yields By Venetis, Ioannis; Ladas, Avgoustinos
  4. Retail Fund Flows and Performance: Insights from Supervisory Data By Martin Hodula; Milan Szabo; Josef Bajzik
  5. Homes Incorporated: Offshore Ownership of Real Estate in the U.K. By Niels Johannesen; Jakob Miethe; Daniel Weishaar

  1. By: Mitali Das; Gita Gopinath; Taehoon Kim; Jeremy C. Stein
    Abstract: This paper explores how non-U.S. central banks behave when firms in their economies engage in currency mismatch, borrowing more heavily in dollars than justified by their operating exposures. We begin by documenting that, in a panel of 53 countries, central bank holdings of dollar reserves are significantly correlated with the dollar-denominated bank borrowing of their non-financial corporate sectors, controlling for a number of known covariates of reserve accumulation. We then build a model in which the central bank can deal with private-sector mismatch, and the associated risk of a domestic financial crisis, in two ways: (i) by imposing ex ante financial regulations such as bank capital requirements; or (ii) by building a stockpile of dollar reserves that allow it to serve as an ex post dollar lender of last resort. The model highlights a novel externality: individual central banks may tend to over-accumulate dollar reserves, relative to what a global planner would choose. This is because individual central banks do not internalize that their hoarding of reserves exacerbates a global scarcity of dollar-denominated safe assets, which lowers dollar interest rates and encourages firms to increase the currency mismatch of their liabilities. Relative to the decentralized outcome, a global planner may prefer stricter financial regulation (e.g., higher bank capital requirements) and reduced holdings of dollar reserves.
    JEL: E42 F4 G15
    Date: 2022–12
  2. By: Felipe E. Aldunate; Zhi Da; Borja Larrain; Clemens Sialm
    Abstract: Frequent, yet uninformed, fund flows in Chilean pension plans generate substantial trading in currency markets due to the high allocation to international securities. These non-fundamental flows have a significant impact on the Chilean peso, which is estimated to have a relatively low price elasticity of 0.81. Hedging by the banking sector propagates the price pressure to currency forward markets and results in violations of the covered interest rate parity. Using trading data and bank balance sheet data, we confirm that regulatory requirements and banks’ risk bearing constraints create limits of arbitrage.
    JEL: F31 F32 F33 G11 G15 G21 G23 G40 G51 H55
    Date: 2022–12
  3. By: Venetis, Ioannis; Ladas, Avgoustinos
    Abstract: We study the co-movement in international zero-coupon government bond yields using a recently proposed methodology by \cite{Choi2018} and \cite{Choi2021} for the estimation of multilevel factor models. We employ a readily available non-proprietary dataset coupled with open-source code which facilitates reproduction of the results but also comparability with the existing bibliography. The ten countries dataset is cross-sectionally expanded to eleven countries with newly constructed data series on the term structure of Greek constant-maturity, government zero-coupon bond rates. We find that the country pair US-Germany is most suitable as an initial candidate for global factor estimation. We confirm that three global factors account for most of the variation in zero-coupon bond yields leaving a small proportion to be (contemporaneously) explained by local factors. Global inflation and global real activity are related to the global level and slope factors. The third global factor, ``curvature'', is strongly related to economic/financial uncertainty linked to systemic risk stemming from the US financial markets.
    Keywords: Sovereign bonds; Yield curve; Term structure; Multilevel factor model; Global factors; Local factors
    JEL: C10 E43 G12 G15
    Date: 2022–12–28
  4. By: Martin Hodula; Milan Szabo; Josef Bajzik
    Abstract: This paper explores flow patterns in retail equity mutual funds related to past and future performance. We employ supervisory data of monthly fund inflows and outflows in the Czech Republic and produce several key findings that shed light on the behavior of households as investors in an emerging market economy. First, we show that investor flows chase past performance and tend to underreact to poor performance - a typical finding in the literature. However, we find that retail investors are very sensitive to poor performance in times of aggregate illiquidity and when investing in funds that hold more illiquid assets. Second, we document that when facing illiquidity and a deteriorating performance, underperforming equity-investing funds experience lower investor purchases and a larger share of redemption requests. We observe similar investor behaviour in periods when retail investors face constraints on their disposable income. At such times, mutual fund inflows are found to decrease significantly and fund outflows to increase. Third, we document the presence of the smart money effect, while finding that it is caused by the buying (but not selling) decisions of retail investors.
    Keywords: Equity funds, liquidity, retail investors, smart money
    JEL: G11 G23
    Date: 2022–12
  5. By: Niels Johannesen; Jakob Miethe; Daniel Weishaar
    Abstract: Ownership of real estate through corporations in offshore tax havens creates opportunities for tax evasion and money laundering and may have undesirable effects in housing markets. In this paper, we study offshore ownership of real estate in the United Kingdom by combining several data sources: administrative data from the land register, a comprehensive transaction database, a propriety database on corporate ownership links, and a handful of offshore data leaks. Our descriptive analysis shows that the market share of offshore corporations has increased over time and varies strongly across market segments: It currently stands at 1.25% in the overall residential market and around 15% for top-end properties. When data leaks allow us to trace ownership through offshore corporations to the beneficial owners, we find that around half have ties to Africa, Asia and the Middle East, but that the largest ’foreign’ investor is the United Kingdom itself. Turning to causal evidence, we show that changes in tax incentives and ownership transparency induce strong responses in patterns of offshore ownership, suggesting that both taxation and secrecy are important motives for the beneficial owners. Finally, we show that the Brexit referendum was followed by a sharp increase in property sales by offshore owners and a large differential decrease in property prices in local areas with more offshore ownership, conditional on area and property characteristics. This suggests that the reduction in demand from offshore investors triggered by Brexit had a negative causal effect on property prices and, more broadly, that offshore ownership can have significant real effects in housing markets.
    Keywords: tax havens, tax evasion, offshore financial centers, real estate, hidden wealth
    JEL: H26 F21 R31
    Date: 2022

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