nep-ifn New Economics Papers
on International Finance
Issue of 2023‒11‒13
thirteen papers chosen by
Jiachen Zhan, University of California,Irvine

  1. CIP deviations: The role of U.S. banks’ liquidity and regulations By Bazán, Walter; Ortiz, Marco; Terrones, Marco; Winkelried, Diego
  2. Inflation surprises across developed and emerging economies By Pacheco, André Sanchez
  3. Integration or fragmentation? A closer look at euro area financial markets By Martin Feldkircher; Karin Klieber
  4. Financial Intermediaries and Demand for Duration By Alberto Plazzi; Andrea Tamoni; Marco Zanotti
  5. Sovereign portfolio composition and bank risk: the case of European banks. By Selva Bahar Baziki; María J. Nieto; Rima Turk-Ariss
  6. Financial Stress and Economic Activity: Evidence from a New Worldwide Index By Hites Ahir; Mr. Giovanni Dell'Ariccia; Davide Furceri; Mr. Chris Papageorgiou; Hanbo Qi
  7. Trends and Inequality in Lifetime Earnings in France By Berthou Antoine
  8. Political risk and external finance: Evidence from cross-country firm-level data By Olayinka Oyekola; Meryem Duygun; Samuel Odewunmi; Temitope Fagbemi
  9. Integrating Stock Features and Global Information via Large Language Models for Enhanced Stock Return Prediction By Yujie Ding; Shuai Jia; Tianyi Ma; Bingcheng Mao; Xiuze Zhou; Liuliu Li; Dongming Han
  10. Investment Efficiency of Private and Public Firms By Pantelis Kazakis; Woon Sau Leung; Steven Ongena
  11. Cross-country comparison of intergenerational poverty transmission in Europe By Carranza, Rafael; Nolan, Brian; Bavaro, Michele
  12. Data Analysis on the Global Market Capitalization Of Domestic Firms From 2013 To 2023 By Chaturvedi, Archit
  13. Econometric Analysis and Forecasting of Madagascar’s Economy: An ARIMAX Approach By ANDRIANADY, Josué R.; Randriamifidy, Fitiavana M.; Ranaivoson, Michel H. P.; Steffanie, Thierry Miora

  1. By: Bazán, Walter; Ortiz, Marco; Terrones, Marco; Winkelried, Diego
    Abstract: This paper inquires how private bank regulation and liquidity in the US are related to the deviations from the covered interest parity (CIP) condition. We find evidence that bank liquidity effects on CIP deviations partially offset those resulting from regulatory changes in a sample of 11 OECD countries over the 2001-2019 period. This finding supports an old conjecture that changes in private banks' liquidity and regulation could significantly affect the wedge between liquid US dollars and illiquid foreign exchange forward contracts in international financial markets. Interestingly, the effects of liquidity on CIP deviations become more important when the impact of bank regulation intensifies, reflecting the presence of interaction effects.
    Keywords: Cross-currency bases; covered interest rate parity; bank regulation; liquidity
    JEL: E44 F31 G14 G15 O24
    Date: 2023–09–15
  2. By: Pacheco, André Sanchez
    Abstract: I construct a novel data-set containing monthly inflation surprises for a set of developed and emerging economies. These data are used in a panel setting to analyze the relationship between inflation surprises and changes in short- and long-term interest rates as well as exchange rates on CPI release days. I find that a 1% upward surprise in monthly inflation is associated with (1) a +7.4bps daily change in the two-year benchmark interest rate; (2) a +5.1bps daily change in the ten-year rate and (3) an appreciation in the domestic exchange rate relative to the U.S. Dollar. Such sensitivities are heterogeneous across country groups. Interest rates in emerging economies are more sensitive to inflation surprises than those in developed markets. In contrast, exchange rates in emerging markets appear to be less sensitive to such surprises relative to developed counterparts.
    Date: 2023–10–17
  3. By: Martin Feldkircher; Karin Klieber
    Abstract: This paper examines the degree of integration at euro area financial markets. To that end, we estimate overall and country-specific integration indices based on a panel vector-autoregression with factor stochastic volatility. Our results indicate a more heterogeneous bond market compared to the market for lending rates. At both markets, the global financial crisis and the sovereign debt crisis led to a severe decline in financial integration, which fully recovered since then. We furthermore identify countries that deviate from their peers either by responding differently to crisis events or by taking on different roles in the spillover network. The latter analysis reveals two set of countries, namely a main body of countries that receives and transmits spillovers and a second, smaller group of spillover absorbing economies. Finally, we demonstrate by estimating an augmented Taylor rule that euro area short-term interest rates are positively linked to the level of integration on the bond market.
    Date: 2023–10
  4. By: Alberto Plazzi (Università della Svizzera italiana; Swiss Finance Institute); Andrea Tamoni (Rutgers Business School); Marco Zanotti (Università della Svizzera italiana; Swiss Finance Institute)
    Abstract: We investigate intermediaries demand for long-term cash flows by estimating a characteristic-based demand system on the equity holdings of primary dealers, pension funds, banks, and insurance companies. Institutions’ demand for equity duration varies over time and in the cross-section as a function of measures of capital availability. In the time-series, when financial constraints are tight, institutions curtail their demand for long-term claims and become more exposed to reinvestment risk. In the cross-section, unconstrained institutions tilt their portfolio more strongly toward long-duration stocks compared to their constrained peers. We conclude that institutional constraints impair the ability to seek for the hedging properties of long duration claims, to the point that institutions may be forced to leave their “preferred-habitat” allocation. Counterfactual analysis shows that shifts in preference for duration generate sizeable effects in the cross-section of stocks, with a stronger impact on firms with long-term cash flows such as high ESG-rated companies.
    Keywords: Institutional demand, Equity duration, Long-term investors, Capital constraints
    JEL: G10 G11 G20
    Date: 2023–10
  5. By: Selva Bahar Baziki (Bloomberg); María J. Nieto (Banco de España); Rima Turk-Ariss (Fondo Monetario Internacional)
    Abstract: We extend the literature on the sovereign-bank nexus by examining the composition effects of sovereign portfolios on banks’ risk profile, unlike previous studies which generally analyzed the determinants of banks’ sovereign portfolios or the size effects of these portfolios. We also differ from previous studies with respect to the measures of risk considered and by covering a sample period that goes well beyond the global financial crisis (2009-2018). Drawing on granular data from the European Banking Authority, we find that banks are riskier when their portfolio includes a higher proportion of securities issued by higher-risk sovereigns or when they are themselves domiciled in a country with high sovereign credit risk. Nevertheless, we do not find conclusive evidence that larger holdings of government securities of the country where the bank is incorporated increase bank risk ex-post. However, the risk profile is higher for banks that received government capital injections than for banks that did not receive capital support in the aftermath of the global financial crisis. Banks that received government capital injections are less risky when their portfolio includes a higher proportion of securities issued by higher-risk sovereigns. These results may indicate that regulatory arbitrage motives at these banks are particularly important.
    Keywords: banks, sovereign crisis, EU
    JEL: G01 G21 G28 G38
    Date: 2023–09
  6. By: Hites Ahir; Mr. Giovanni Dell'Ariccia; Davide Furceri; Mr. Chris Papageorgiou; Hanbo Qi
    Abstract: This paper uses text analysis to construct a continuous financial stress index (FSI) for 110 countries over each quarter during the period 1967-2018. It relies on a computer algorithm along with human expert oversight and is thus easy to update. The new indicator has a larger country and time coverage and higher frequency than similar measures focusing on advanced economies. And it complements existing binary chronologies in that it can assess the severity of financial crises. We use the indicator to assess the impact of financial stress on the economy using both country- and firm-level data. Our main findings are fivefold: i) consistent with existing literature, we show an economically significant and persistent relationship between financial stress and output; ii) the effect is larger in emerging markets and developing economies and (iii) for higher levels of financial stress; iv) we deal with simultaneous causality by constructing a novel instrument—financial stress originating from other countries—using information from the text analysis, and show that, while there is clear evidence that financial stress harms economic activities, OLS estimates tend to overestimate the magnitude of this effect; (iv) we confirm the presence of an exogenous effect of financial stress through a difference-in-differences exercise and show that effects are larger for firms that are more financially constrained and less profitable.
    Keywords: Financial stress; text analysis; country reports; continuous indicator; country and firm economic activity.
    Date: 2023–10–20
  7. By: Berthou Antoine
    Abstract: This paper shows that international sanctions can undermine the role of the US dollar in trade invoicing. The analysis is based on the episode of international sanctions targeting Russia after the invasion of regions of Ukraine in 2014. While European sanctions increased trade costs for firms located in the EU and conducting transactions with Russia, sanctions imposed by the United States affected firms located in third countries due to the extra-territoriality of the US law. This created an incentive to diversify away from the US dollar to avoid these sanctions when exporting to target countries such as Russia. The empirical exercise relies on detailed customs data for France with information on the currency of invoicing by transaction. Following the start of the Western sanctions on Russia in 2014, the propensity of French exporters to invoice their contracts in US dollars decreased. Estimation results highlight the role played by (i) strategic complementarities between firms, (ii) the diversification of Russian foreign reserves, (iii) US secondary sanctions targeting exports of dual-use goods, and (iv) threats of US secondary sanctions faced by exporters’ banks.
    Keywords: Dollar dominance, Currency Invoicing, International Sanctions
    JEL: F10 F14 F44
    Date: 2023
  8. By: Olayinka Oyekola (Department of Economics, University of Exeter); Meryem Duygun (Business School, University of Nottingham); Samuel Odewunmi (Department of Economics, University of Exeter); Temitope Fagbemi (Aberdeen Business School, Robert Gordon University)
    Abstract: Drawing on the strands of literature on agency theory, institutions and financial development, this paper investigates whether, and how, political risk can explain access to external finance by 127, 542 firms in 108 countries over the period 2006 to 2021. We do this by combining international firm-specific data with a globally representative political risk measure to explore variations in access to external finance for working capital and fixed investment by firms. Our results provide robust evidence of a strong positive impact of political risk on external finance. Specifically, we find that a one-standard-deviation increase in political risk leads to a 10.89% increase in access to external finance for working capital of sampled firms. We then examine which dimensions of political risk matter for external finance, finding that bureaucratic quality, corruption, government stability, socioeconomic conditions, investment profile, external conflict, and ethnic tensions are the relevant individual components. Further analyses show that the effects of political risk on external finance for working capital are amplified for firms that are either experiencing low growth, innovative, in the service sector, or small- and medium-sized enterprises. Our results survive a battery of robustness checks, including an alternative proxy for external finance (fixed investment), controlling for additional confounding factors and outliers. Given the central importance of firms as engines of growth, our paper makes an insightful contribution to the literature on the institutional determinants of access to entrepreneurial financing by firms.
    Keywords: political risk, institutions, access to finance, external finance, working capital, firm-level evidence
    JEL: G20 G30 O16 O50 L26
    Date: 2023–10–01
  9. By: Yujie Ding; Shuai Jia; Tianyi Ma; Bingcheng Mao; Xiuze Zhou; Liuliu Li; Dongming Han
    Abstract: The remarkable achievements and rapid advancements of Large Language Models (LLMs) such as ChatGPT and GPT-4 have showcased their immense potential in quantitative investment. Traders can effectively leverage these LLMs to analyze financial news and predict stock returns accurately. However, integrating LLMs into existing quantitative models presents two primary challenges: the insufficient utilization of semantic information embedded within LLMs and the difficulties in aligning the latent information within LLMs with pre-existing quantitative stock features. We propose a novel framework consisting of two components to surmount these challenges. The first component, the Local-Global (LG) model, introduces three distinct strategies for modeling global information. These approaches are grounded respectively on stock features, the capabilities of LLMs, and a hybrid method combining the two paradigms. The second component, Self-Correlated Reinforcement Learning (SCRL), focuses on aligning the embeddings of financial news generated by LLMs with stock features within the same semantic space. By implementing our framework, we have demonstrated superior performance in Rank Information Coefficient and returns, particularly compared to models relying only on stock features in the China A-share market.
    Date: 2023–10
  10. By: Pantelis Kazakis (University of Glasgow); Woon Sau Leung (University of Edinburgh; University of Southampton); Steven Ongena (University of Zurich; Swiss Finance Institute; KU Leuven; NTNU Business School; CEPR)
    Abstract: We document that private firms are more efficient in investment than public firms. Exploiting the Sarbanes-Oxley Act that reduces agency problems of public firms but raises their compliance costs, we find that public firms, especially those with more complex operations, become more inefficient after SOX. Private firms that are likely more financially constrained exhibit greater investment efficiency. Furthermore, during periods of heightened uncertainty and when operating within industries characterized by increased environmental activism, consumer focus, and greater labor expenditure, public firms tend to exhibit higher levels of inefficiency. Mediation tests show that the more efficient investment of private firms translates into future profitability gains. Overall, the investment inefficiency of public firms does not stem from higher agency costs but rather from the inherent difficulty and costs of managing a complex organization.
    Keywords: Investment Efficiency; Public Firms; Private Firms; Information Asymmetry; Agency Costs; Compliance Costs; Uncertainty
    JEL: D25 G30 G32 G38 L11
    Date: 2023–10
  11. By: Carranza, Rafael; Nolan, Brian; Bavaro, Michele
    Abstract: While the influence of poverty in childhood on adulthood outcomes has been extensively studied, little is known about how the strength of intergenerational persistence in poverty itself varies across countries. Here we examine the intergenerational persistence of poverty in a comparative analysis of 30 European countries using data from the 2019 ad hoc module of the EU-SILC dataset. We construct proxy measures of poverty in the parental household employing information on the inability to meet basic needs, financial hardship, parental education and occupational social class. The strength of the association between current poverty based on the indicators at the core of the EU's social inclusion process and these measures of parental poverty is assessed by estimating odds ratios and marginal effects. The cross-country variation in poverty persistence is probed in terms of its relationship with country characteristics. Mediation analysis highlights the role of own education as well as occupation in underpinning the observed relationship between current and parental poverty. Finally, differences across age cohorts in the strength of poverty persistence are examined.
    Keywords: Intergenerational transmission , poverty, multidimensional poverty, cross-country comparison, disadvantage
    JEL: D63 I32 J62
    Date: 2023–10
  12. By: Chaturvedi, Archit
    Abstract: In this report, a dataset providing information with respect to the market capitalization of companies globally based on different regions across the world by year was analyzed through the use of advanced analytics and data visualization techniques in Python. These regions were the Americas, Asia-Pacific, and the EMEA, as well as the comprehensive data of the total global market capitalization. The data was analyzed from years 2013 to 2023, with 2020 being excluded from the dataset. Four distinct polynomial regression models with degree n=4 were formulated and provided to predict future values of market capitalization based on region, as well as the total global market capitalization. Furthermore, the market capitalizations of each region, as well as the total market capitalization, were correlated with one another to determine the relationship between the market capitalizations of one region with another, as well as the correlation between the market capitalization of each region with the total global market capitalization, which rendered strong positive correlations between the market capitalization of each region with one another, as well as with the total global market capitalization.
    Date: 2023–10–09
  13. By: ANDRIANADY, Josué R.; Randriamifidy, Fitiavana M.; Ranaivoson, Michel H. P.; Steffanie, Thierry Miora
    Abstract: This research conducts an in-depth econometric analysis of key economic indicators in Madagascar, with a specific focus on Gross Domestic Product (GDP) and the USD exchange rate (USD/MGA). Employing the rigorous Box-Jenkins methodology with ARIMAX modeling, we meticulously examine historical trends, model time series data, and provide forecasts for the year 2023. Our analysis notably highlights a projected decline in Madagascar’s GDP for the year 2023, shedding light on the potential repercussions of various factors such as impending presidential elections and ongoing challenges like electricity shortages. These factors have the potential to exert a significant influence on the trajectory of the country’s economy. While ARIMAX models constitute invaluable tools for forecasting, we underscore the necessity of incorporating a more expansive array of econometric methodologies to bolster economic resilience and inform policymaking. This study underscores the critical importance of combining data-driven modeling with a profound understanding of the contextual intricacies that characterize Madagascar’s intricate economic landscape. Moreover, it extends its relevance to other emerging economies facing similar complexities and challenges.
    Keywords: Econometrics, ARIMAX modeling, ARIMA modeling, Madagascar, Gross Domestic Product, USD exchange rate, Forecasting, Economic Analysis, Box-Jenkins methodology, Time Series Data.
    JEL: A1 A10 C1 C5
    Date: 2023

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