nep-ifn New Economics Papers
on International Finance
Issue of 2023‒10‒02
six papers chosen by
Jiachen Zhan, University of California,Irvine

  1. Foreign Exchange Intervention with UIP and CIP Deviations: The Case of Small Safe Haven Economies By Philippe Bacchetta; Kenza Benhima; Brendan Berthold
  2. Hard Commodities Hit Harder: Global Financial Risk and Commodity Exporters By Gabriela Contreras
  3. Liquidity and Exchange Rates: An Empirical Investigation By Engel, Charles; Wu, Steve Pak Yeung
  4. Price Formation in the Foreign Exchange Market By Florent Gallien; Sergei Glebkin; Serge Kassibrakis; Semyon Malamud; Alberto Teguia
  5. Default Clustering Risk Premium and its Cross-Market Asset Pricing Implications By Kiwoong Byun; Baeho Kim; Dong Hwan Oh
  6. "Navigating Global Markets: The Impact of FDI on Startups' Access to Insights, Networks, and Brand Visibility" By Yeboah, Samuel

  1. By: Philippe Bacchetta (University of Lausanne; Swiss Finance Institute; Centre for Economic Policy Research (CEPR)); Kenza Benhima (University of Lausanne; Centre for Economic Policy Research (CEPR)); Brendan Berthold (University of Lausanne)
    Abstract: We examine the welfare-based opportunity cost of foreign exchange (FX) intervention when both CIP and UIP deviations are present. We consider a small open economy that receives international capital flows through constrained international financial intermediaries. Deviations from CIP come from limited arbitrage or through a convenience yield, while UIP deviations are also affected by risk. We show that the sign of CIP and UIP deviations may differ for safe haven countries. We find that there may be a benefit, rather than a cost, of FX reserves if international intermediaries value the safe haven properties of a currency more than domestic households. We show that this has been the case for the Swiss franc and the Japanese Yen. We examine the optimal policy of a constrained central bank planner in this context.
    Date: 2023–08
  2. By: Gabriela Contreras
    Abstract: In this study, I investigate the response of commodity exporters to the global financial cycle and how it depends on the type of commodity exported. I first show that following an upsurge in global financial risk, the prices of hard commodities (such as energy, metals, and minerals) decline considerably more than soft commodities. Through a panel SVAR analysis, I compare the reactions of hard and soft commodity exporters to an unexpected increase in global financial risk. My findings reveal that hard commodity exporters experience a more significant decline in their commodity terms of trade, a higher increase in their country spread, and a more substantial reduction in output. I set up a small open economy model to explore the effects of global risk shocks on country spreads, depending on the type of commodities an economy exports. The results of this model suggest that global risk shocks are primarily transmitted through commodity prices, which means that hard commodity exporters are impacted more severely due to the composition of their exports.
    Date: 2023–08
  3. By: Engel, Charles; Wu, Steve Pak Yeung
    Abstract: Abstract: We find strong empirical evidence that the liquidity yield on government bonds in combination with standard economic fundamentals can well account for nominal exchange rate movements. We find impressive evidence that changes in the liquidity yield are significant in explaining exchange rate changes for all the G10 countries, and we stress that the US dollar is not special in this relationship. We show how these relationships arise out of a canonical two-country New Keynesian model with liquidity returns. Additionally, we find a role for sovereign default risk and currency swap market frictions.
    Keywords: Economics, Applied Economics, Econometrics, Applied economics, Economic theory
    Date: 2023–09–05
  4. By: Florent Gallien (Swissquote); Sergei Glebkin (INSEAD); Serge Kassibrakis (Swissquote); Semyon Malamud (Ecole Polytechnique Federale de Lausanne; Centre for Economic Policy Research (CEPR); Swiss Finance Institute); Alberto Teguia (UBC Sauder)
    Abstract: We study joint price formation in the dealer-to-dealer (D2D) and dealer-to-customer (D2C) segments of the foreign exchange (FX) market, both theoretically and empirically. Our theory accounts for dealer heterogeneity, market power, and non-exclusive customer-dealer relationship and shows that several statistics of the cross-section of D2C quotes help predict D2D prices and liquidity. In particular, D2D prices are negatively related to cross-sectional covariance between D2C mid-quotes and spreads, contrary to predictions of other theories of two-tiered markets. Our predictions are confirmed empirically using unique proprietary D2C data. Model calibration reveals and quantifies the FX market’s inelasticity and non-competitiveness.
    Keywords: Liquidity, Foreign Exchange, OTC markets, Price Impact, Market Power
    JEL: F31 G12 G14 G21
    Date: 2023–08
  5. By: Kiwoong Byun; Baeho Kim; Dong Hwan Oh
    Abstract: This study examines the market-implied premiums for bearing default clustering risk by analyzing credit derivatives contracts on the CDX North American Investment Grade (CDX.NA.IG) portfolio between September 2005 and March 2021. Our approach involves constructing a time series of reference tranche rates exclusively derived by single-name CDS spreads. The default clustering risk premium (DCRP) is captured by comparing the original and reference tranche spreads, with the former exceeding the latter when investors require greater compensation for correlated defaults at the portfolio level. The fitted DCRP level significantly increased in response to the 2007-9 global financial crisis and remained relatively stable for a period, followed by a gradual decline beginning in 2016. Notably, the COVID-19 shock caused another sharp rise in the DCRP level. Our empirical analysis finds that the estimated DCRP has significant implications for asset pricing, particularly in affecting the investment opportunities available to U.S. stock investors during times of instability in the financial system.
    Keywords: Credit Default Swap (CDS); CDS Index (CDX); Reference Tranche Rate; Default Clustering Risk Premium
    JEL: G10 C60 C40
    Date: 2023–08–18
  6. By: Yeboah, Samuel
    Abstract: This systematic review explores the multifaceted impact of Foreign Direct Investment (FDI) on local startups' access to global markets. FDI plays a pivotal role in facilitating the expansion of local businesses into international markets by offering valuable resources and insights. The review delves into several critical dimensions: Distribution Networks: FDI grants startups access to established distribution networks of multinational corporations (MNCs), providing a channel to reach a broader customer base. It discusses the trade-offs between distribution-oriented and production-oriented FDI, highlighting their effects on startups' global reach. Market Knowledge: Foreign investors bring invaluable market insights and intelligence, aiding startups in understanding customer preferences, cultural nuances, and competitive landscapes. This section explores how market knowledge helps foreign investors overcome the liability of foreignness and enhances their competitiveness and innovation. Brand Visibility: Partnering with well-known foreign corporations enhances startups' credibility and visibility in global markets, leading to increased trust among potential customers. It investigates the determinants of brand visibility and its role in overcoming foreignness. Local Insights: FDI provides startups with access to foreign investors' local expertise, enabling them to tailor their products or services to meet the demands of specific international markets. This paper analyses the sources and determinants of local insights. Through an examination of these dimensions, this systematic review sheds light on the transformative potential of FDI in enabling local startups to access international markets. It also emphasizes the importance of strategic partnerships, knowledge sharing, and the adaptation of strategies for success in global business environments.
    Keywords: Global Markets; Distribution Networks; Market Knowledge; Brand Visibility; Local Insights; Startups; International Expansion; Market Entry; Multinational Corporations (MNCs)
    JEL: D22 F21 F23 L25 L26 L86 M13 O32
    Date: 2023–05–17

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