nep-ifn New Economics Papers
on International Finance
Issue of 2023‒05‒22
five papers chosen by
Jiachen Zhan
University of California,Irvine

  1. The Global Financial Cycle and Country Risk in Emerging Markets During Stress Episodes: A Copula-CoVaR Approach By Melo-Velandia, Luis Fernando; Romero-Chamorro, José Vicente; Ramírez-González, Mahicol Stiben
  2. Collateral Advantage: Exchange Rates, Capital Flows and Global Cycles By Michael B. Devereux; Charles Engel; Steve Pak Yeung Wu
  3. Dollar Dominance in Cross-border Bank Loans and Its Response to Uncertainties By ITO Hiroyuki; XU Ying
  4. Fund raising in the international capital markets in 2021 By Laura Álvarez; Alberto Fuertes; Luis Molina; Emilio Muñoz de la Peña
  5. IPOs and Corporate Tax Planning By Dobridge, Christine L.; Lester, Rebecca; Whitten, Andrew

  1. By: Melo-Velandia, Luis Fernando; Romero-Chamorro, José Vicente; Ramírez-González, Mahicol Stiben
    Abstract: In this paper, we analyze the tail-dependence structure of credit default swaps (CDS) and the global financial cycle for a group of eleven emerging markets. Using a Copula-CoVaR model, we provide evidence that there is a significant taildependence between variables related with the global financial cycle, such as the VIX, and emerging market CDS. These results are particularly important in the context of distressed global financial markets (right tail of the distributions of the VIX) because they provide international investors with relevant information on how to rebalance their portfolios and a more suitable metric to analyze sovereign risk that goes beyond the traditional CoVaR. Additionally, we present further evidence supporting the importance of the global financial cycle in sovereign risk dynamics.
    Keywords: Global financial cycle; Country risk; CDS; Copula-CoVaR
    JEL: G15 G17 C58
    Date: 2023–05
  2. By: Michael B. Devereux; Charles Engel; Steve Pak Yeung Wu
    Abstract: We construct a two-country New Keynesian model in which US government debt has an advantage as a superior collateral asset in the balance sheets of banks. The model can account for the observed response of the US dollar and US bond returns to a global downturn, in particular when the downturn is associated with a global financial crisis. In our model, the U.S. enjoys an “exorbitant privilege” as its government bonds are desired by banks both in the U.S. and abroad as superior collateral. In times of global stress, the dollar appreciates and the “convenience yield” earned by U.S. government bonds increases. There is “retrenchment” - each country reduces its holdings of foreign assets - a critical determinant of which is the endogenous response of prices and returns. In addition, the model displays a U.S. real exchange rate appreciation despite that domestic absorption in the US falls relative to the rest of the world during a global downturn, thus addressing the “reserve currency paradox” highlighted by Maggiori (2017).
    JEL: F30 F40 G15
    Date: 2023–04
  3. By: ITO Hiroyuki; XU Ying
    Abstract: This paper examines whether, and if so, to what extent uncertainty increases the degree of the use of U.S. dollars in cross-country loans. To this end, we investigate what factors affect the choice of currency for denomination of cross-border syndicated loans. Among them, we focus on whether external shocks and global uncertainties, such as uncertainty stemming from U.S. monetary, fiscal, and trade policies, financial instability (measured by VIX), and infectious disease risk affect the choice of international loans. The analysis uses micro firm-level data on syndicated loans agreed between borrowers located in 25 emerging market economies (EMEs) and lenders from 59, from the 1995 to 2019 period. We find that uncertainties driven by U.S. trade policy led to a higher USD share in total international loans from the borrowers’ perspective, indicating the borrowers’ inclination to avert the exchange rate risk or volatility that may arise due to the uncertainty of U.S. trade policy. A rise in the general level of U.S. economic policy and the intensity of financial instability both have a negative impact on the USD share, likely reflecting dollar shortages at the time of increasing economic policy uncertainty and financial instability. The estimation on the currency shares from the lenders’ perspective also confirms these impacts on U.S. economic uncertainties and financial instability. We also test the correlation between currency choice for international loans and the borrowers’ revenue volatility, and find that syndicated loans in the local currency are associated with less revenue volatility compared to USD-denominated loans.
    Date: 2023–04
  4. By: Laura Álvarez (Banco de España); Alberto Fuertes (Banco de España); Luis Molina (Banco de España); Emilio Muñoz de la Peña (Banco de España)
    Abstract: This paper analyses the main trends in the private sector’s issuance activity in international capital markets during 2021, a year in which, despite positive developments that resulted in volumes above pre-2020 levels, the record 2020 figures were not achieved. Thus, the total issuance volume of debt securities declined due to lower issuance in the non-financial corporate sector, which may have been driven by the large amount of funds raised during 2020, lower funding needs for precautionary reasons in view of the improved health situation and higher funding costs. However, bond issuance by the banking sector and other financial institutions increased; this growth was concentrated in the United States, on expectations of monetary policy tightening in that area and regulatory factors. High-yield bond issuance also increased, benefiting from lower risk aversion. By region, the sharpest declines were in the United States, followed by the United Kingdom and the euro area. Conversely, issuance in the equity markets was strong and surpassed the 2020 figures.
    Keywords: bond issuance, international capital markets, corporate finance, debt securities, equities
    JEL: G15 G20 G32
    Date: 2022–11
  5. By: Dobridge, Christine L. (Federal Reserve Board); Lester, Rebecca (Stanford U); Whitten, Andrew (US Department of the Treasury)
    Abstract: Does going public affect the amount and type of corporate tax planning? Using a panel of U.S. corporate tax return data from 1994 to 2018, we show that IPO completion is associated with the implementation of multinational income shifting strategies central to the current international tax policy debate. Specifically, firms (i) expand their foreign tax haven presence, (ii) enter into cross-border agreements that accompany intangible asset transfers to foreign subsidiaries, and (iii) increase their level of foreign related-party payments around the time that they go public. The effects are strongest among firms that switch to more sophisticated tax advisors in the years preceding the IPO. In contrast, we observe little domestic tax planning because large stock option deductions, which increase as a consequence of the IPO, provide large domestic tax shields. The paper contributes to the nascent literature studying IPOs by documenting the types and timing of specific tax strategies that enable public firms to remain lightly taxed in the post-IPO period. Furthermore, the findings imply that U.S. tax policies targeted at early-stage innovative firms are critical for retaining domestically developed IP--and the income earned on such assets--for the U.S. tax base.
    JEL: D12 E21 H24
    Date: 2022–11

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