nep-ifn New Economics Papers
on International Finance
Issue of 2023‒09‒25
six papers chosen by
Jiachen Zhan, University of California,Irvine

  1. Global Capital Allocation By Florez-Orrego, Sergio; Maggiori, Matteo; Schreger, Jesse; Sun, Ziwen; Tinda, Serdil
  2. US dollar is losing it position of a reserve currency: How the BRICS development bank can ensure the soft landing By Popov, Vladimir
  3. The Financial Market of Environmental Indices By Thisari K. Mahanama; Abootaleb Shirvani; Svetlozar Rachev; Frank J. Fabozzi
  4. Differences between NZ and U.S. individual investor sentiment: More noise or more information? By Jędrzej Białkowski; Moritz Wagner; Xiaopeng Wei
  5. Why Global and Local Solutions of Open-Economy Models with Incomplete Markets Differ and Why it Matters By Oliver de Groot; Ceyhun Bora Durdu; Enrique G. Mendoza
  6. International Attitudes Toward Global Policies By Adrien Fabre; Thomas Douenne; Linus Mattauch

  1. By: Florez-Orrego, Sergio; Maggiori, Matteo; Schreger, Jesse; Sun, Ziwen; Tinda, Serdil
    Abstract: We survey the literature on global capital allocation. We begin by reviewing the rise of cross-border investment, the shift towards portfolio investment, and the literature focusing on aggregate patterns in multilateral and bilateral positions. We then turn to the recent literature that uses micro-data to document patterns in global capital allocations. We focus on the importance of the currency of denomination of assets in international portfolios and the role that tax havens and offshore financial centers play in intermediating global capital. We conclude with directions for future research in this area.
    Date: 2023–08–18
  2. By: Popov, Vladimir
    Abstract: The current process of moving away from the US dollar as a reserve currency will cause the outflow of capital from the US, leading to the depreciation of the dollar and/or increase in the interest rates that will cause costly real restructuring – reallocation of resources from less competitive to more competitive export-oriented industries accompanied by an increase in unemployment. This paper makes parallels with the decline of the British pound after the Second World War, arguing that the loss of competitiveness and the stop-go policies in Britain in the 1950s-70s can well be an indicator of what is going to happen in the US. One of the new features of the current situation, however, is the freezing of reserve assets of many developing countries (Syria, Libya, Iran, Venezuela, Afghanistan, Russia) and the danger of freezing assets of other countries (China and Saudi Arabia included) – this can make the run away from the US dollar an uncontrolled process. Whereas in the long term this process may be beneficial for the US and the world economy, short- and medium- term adjustment costs can be extremely high. To ensure a soft landing the New Development Bank of BRICS countries can issue bonds that would be sold to developing countries, whose assets have been frozen or may be frozen by the West, so that they can store their foreign exchange reserves in these bonds. The Bank will invest the proceeds from the sale of these bonds in the traditional financial instruments for storing foreign exchange reserves - US and EU treasury bills and bonds denominated in the same dollars and euros. Bonds of the Bank would be considered safe because the US and EU will not risk freezing the assets of the Bank, as this would mean a major conflict with all BRICS countries and the Global South. For the Western countries, this option is not only acceptable, but also desirable: the new Bank will transfer the current direct holding of Western securities by developing countries into the holdings of the same Western financial instruments through the Bank, ensuring the soft landing.
    Keywords: Pound and dollar as reserve currencies, outflow of capital, accumulation of foreign exchange reserves (FOREX), BRICS, New Development Bank
    JEL: F31 F32 F33 F63 N14 O19
    Date: 2023–08–20
  3. By: Thisari K. Mahanama; Abootaleb Shirvani; Svetlozar Rachev; Frank J. Fabozzi
    Abstract: This paper introduces the concept of a global financial market for environmental indices, addressing sustainability concerns and aiming to attract institutional investors. Risk mitigation measures are implemented to manage inherent risks associated with investments in this new financial market. We monetize the environmental indices using quantitative measures and construct country-specific environmental indices, enabling them to be viewed as dollar-denominated assets. Our primary goal is to encourage the active engagement of institutional investors in portfolio analysis and trading within this emerging financial market. To evaluate and manage investment risks, our approach incorporates financial econometric theory and dynamic asset pricing tools. We provide an econometric analysis that reveals the relationships between environmental and economic indicators in this market. Additionally, we derive financial put options as insurance instruments that can be employed to manage investment risks. Our factor analysis identifies key drivers in the global financial market for environmental indices. To further evaluate the market's performance, we employ pricing options, efficient frontier analysis, and regression analysis. These tools help us assess the efficiency and effectiveness of the market. Overall, our research contributes to the understanding and development of the global financial market for environmental indices.
    Date: 2023–08
  4. By: Jędrzej Białkowski (University of Canterbury); Moritz Wagner (University of Canterbury); Xiaopeng Wei
    Abstract: In this study, we introduce a newly created sentiment index of individual investors in NZ constructed similar to the well-known sentiment index provided by the American Association of Individual Investors (AAII) in the U.S. This unique setup allows us to compare different aspects of investors’ behaviour in both countries. We show that NZ market participants are less confident about the directional movement of the stock market, their expectations are more volatile and their distributions have fatter tails. By contrast, both bullish and bearish sentiment is more persistent among U.S. investors. Furthermore, our analysis of return predictability reveals that both groups of investors behave as noise traders. However, the results for NZ investors are stronger. Overall, our findings call for better financial education, particularly in the area of equity investing.
    Keywords: AAII sentiment index, Information traders, Noise traders, NZ sentiment index, Return predictability
    JEL: G11 G14 G18
    Date: 2023–08–01
  5. By: Oliver de Groot; Ceyhun Bora Durdu; Enrique G. Mendoza
    Abstract: Global and local methods used to study open-economy incomplete-markets models yield different cyclical moments, impulse responses, spectral densities and precautionary savings. Endowment and RBC model solutions obtained with first-order, higher-order, and risky-steady-state local methods are compared with fixed-point-iteration global solutions. Analytic and numerical results show that the differences are due to the near-unit-root nature of net foreign assets under incomplete markets and inaccuracies of local methods in computing their autocorrelation. In a Sudden Stops model, quasi-linear methods that handle occasionally binding constraints understate the size of credit constraint multipliers, financial premia and macroeconomic responses.
    JEL: F41 F44 G01 G15
    Date: 2023–08
  6. By: Adrien Fabre (CNRS, CIRED); Thomas Douenne (University of Amsterdam); Linus Mattauch (TU Berlin)
    Abstract: We document majority support for policies entailing global redistribution and climate mitigation. Recent surveys on 40, 680 respondents in 20 countries covering 72% of global carbon emissions show strong support for an effective way to jointly combat climate change and poverty: a global carbon price funding a global basic income, called the “Global Climate Scheme†(GCS). Using complementary surveys on 8, 000 respondents in the U.S., France, Germany, Spain, and the UK, we test several hypotheses that could reconcile strong stated support with a lack of salience in policy circles. A list experiment shows no evidence of social desirability bias, majorities are willing to sign a real-stake petition, and global redistribution ranks high in the prioritization of policies. Conjoint analyses reveal that a platform is more likely to be preferred if it contains the GCS or a global tax on millionaires. Universalistic attitudes are confirmed by an incentivized donation. In sum, our findings indicate that global policies are genuinely supported by a majority of the population. Public opinion is therefore not the reason that they do not prominently enter political debates.
    Keywords: Climate change, global policies, cap-and-trade, attitudes, survey
    JEL: P48 Q58 H23 Q54
    Date: 2023–09

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