nep-ifn New Economics Papers
on International Finance
Issue of 2023‒11‒27
twelve papers chosen by
Jiachen Zhan, University of California,Irvine

  1. China’s footprint in global financial markets By Lodge, David; Manu, Ana-Simona; Van Robays, Ine
  2. The world uncertainty index By Hites Ahir; Nicholas Bloom; Davide Furceri
  3. Rising Interest Rates Complicate Banks’ Investment Portfolios By Carl White
  4. Rising Interest Rates Bring Opportunities and Risks for Banks By Carl White
  5. Heterogeneous macroprudential policies and corporate financing decisions By Bakkar, Yassine; Machokoto, Michael
  6. Measuring U.S. Cross-Border Securities Flows: New Data and A Guide for Researchers By Carol C. Bertaut; Ruth A. Judson
  7. What drives foreign real estate investment? A country-level panel analysis By Rong Wang; Anupam Nanda; Eero Valtonen
  8. Linkages among the Foreign Exchange, Stock, and Bond Markets in Japan and the United States By Yi Jiang; Shohei Shimizu
  9. Balancing Volatility and Returns in the Czech National Bank's Foreign Exchange Portfolio By Tomas Adam; Ales Michl; Michal Skoda
  10. Demographics and Real Interest Rates Across Countries and Over Time By Carlos Carvalho; Andrea Ferrero; Felipe Mazin; Fernanda Nechio
  11. Price-determination and -setting in global production networks of critical minerals: The London Metal Exchange, price reporting agencies and digital trading platforms By Wojewska, Aleksandra; Staritz, Cornelia; Tröster, Bernhard
  12. Closing the Investment Gap to Achieve Paris Agreement Goals By Fatih Yilmaz; Fahad A. Alswaina; Fateh Belaid; Mohamad Hejazi; Mari Luomi

  1. By: Lodge, David; Manu, Ana-Simona; Van Robays, Ine
    Abstract: Using daily data since 2017, we disentangle China-specific structural shocks driving Chinese financial markets and examine spillovers across global markets. The novelty of this paper consists of simultaneously identifying China shocks with shocksemanating from the United States and shocks to global risk sentiment – two major forces driving global financial markets – to ensure that China spillover estimates do not reflect common factors. Our results show that shocks originating in China havematerial impacts on global equity markets, although spillovers are much smaller than those following shocks in the United States, or those triggered by shifts in global risk sentiment. By contrast, shocks from China account for a significant proportion of variation in global commodity prices, more on a par with those of the United States. Nevertheless, spillovers from China can be significantly amplified in an environment of heightened global volatility, or when the shocks are large. JEL Classification: E44, E52, G15
    Keywords: China shocks, commodities, global financial markets, spillovers
    Date: 2023–11
  2. By: Hites Ahir; Nicholas Bloom; Davide Furceri
    Abstract: We construct the World Uncertainty Index (WUI) for an unbalanced panel of 143 individual countries on a quarterly basis from 1952. This is the frequency of the word "uncertainty" in the quarterly Economist Intelligence Unit country reports. Globally, the Index spikes around major events like the Gulf War, the Euro debt crisis, the Brexit vote and the COVID pandemic. The level of uncertainty is higher in developing countries but is more synchronized across advanced economies with their tighter trade and financial linkages. In a panel vector auto regressive setting we find that innovations in the WUI foreshadow significant declines in output. This effect is larger and more persistent in countries with lower institutional quality, and in sectors with greater financial constraints.
    Keywords: world uncertainty index, WUI, Economist Intelligence Unit, Gulf War, Brexit, Euro debit, Covid, pandemic, innovation
    Date: 2022–12–15
  3. By: Carl White
    Abstract: Rising interest rates are posing risks for banks, which could face funding challenges, earnings pressures and issues with capital.
    Keywords: interest rates; bank investments
    Date: 2023–02–09
  4. By: Carl White
    Abstract: Higher interest rates can improve net interest margins, but higher rates can also generate risks that banks must properly manage.
    Keywords: interest rates
    Date: 2022–11–07
  5. By: Bakkar, Yassine; Machokoto, Michael
    Abstract: Utilizing data from 31, 336 firms across 69 countries over the period 2011-2017, we find evidence suggesting macroprudential policies have a significant negative impact on corporate debt, particularly long-term debt. We further find that macroprudential policies have heterogeneous effects, with a greater impact observed among firms facing binding credit constraints and high market competition, as well as those operating in countries with less developed institutions. These findings underscore the importance of institutional factors in determining the effectiveness of macroprudential policies.
    Keywords: Capital structure, debt maturity, macroprudential policies
    JEL: G20 G30 G32
    Date: 2023
  6. By: Carol C. Bertaut; Ruth A. Judson
    Abstract: Understanding the effects of capital flows across countries depends critically on accurate and comprehensive data. For the U.S., data on cross-border securities holdings and transactions are collected through the TIC (Treasury International Capital) data system. As we have previously noted, it has long been difficult to reconcile the TIC data on securities holdings with the TIC S transactions data (see Bertaut and Tryon (2007) and Bertaut and Judson (2014, 2022)).
    Date: 2023–10–02
  7. By: Rong Wang; Anupam Nanda; Eero Valtonen
    Abstract: Over the last few decades, there has been a consistent upward trend in global real estate investment, driven by global economic reforms and the emergence of an integrated global financial market. Previous studies have identified diversification benefits and the possibility of obtaining higher returns on investments as rationales for international real estate investment. However, there is still a paucity of literature examining the macroeconomic and institutional determinants of foreign real estate investment. In this paper, we use panel data models to determine the impacts of a range of those factors, such as infrastructure development, financial development, exchange rate risks, and interest rate on foreign real estate investment. The linkages between international volatility, institutional governance development, property regulations, and foreign real estate investment are also considered. Drawing on information on real estate sector transaction activities over 2003-2021 from the S&P Capital IQ Pro database and employing a range of econometric methods, the analysis finds robust economic growth, a strong domestic financial system, higher transparency of global real estate and a strong governance regime boost higher foreign capital flows into real estate sectors. However, different dimensions of governance appear to have varying levels of influence. These results are robust to a number of alternative specifications and common estimation biases.
    Keywords: Cross-border flows; Panel Data Analysis; Real Estate Investment
    JEL: R3
    Date: 2023–01–01
  8. By: Yi Jiang; Shohei Shimizu
    Abstract: While economic theory explains the linkages among the financial markets of different countries, empirical studies mainly verify the linkages through Granger causality, without considering latent variables or instantaneous effects. Their findings are inconsistent regarding the existence of causal linkages among financial markets, which might be attributed to differences in the focused markets, data periods, and methods applied. Our study adopts causal discovery methods including VAR-LiNGAM and LPCMCI with domain knowledge to explore the linkages among financial markets in Japan and the United States (US) for the post Covid-19 pandemic period under divergent monetary policy directions. The VAR-LiNGAM results reveal that the previous day's US market influences the following day's Japanese market for both stocks and bonds, and the bond markets of the previous day impact the following day's foreign exchange (FX) market directly and the following day's Japanese stock market indirectly. The LPCMCI results indicate the existence of potential latent confounders. Our results demonstrate that VAR-LiNGAM uniquely identifies the directed acyclic graph (DAG), and thus provides informative insight into the causal relationship when the assumptions are considered valid. Our study contributes to a better understanding of the linkages among financial markets in the analyzed data period by supporting the existence of linkages between Japan and the US for the same financial markets and among FX, stock, and bond markets, thus highlighting the importance of leveraging causal discovery methods in the financial domain.
    Date: 2023–10
  9. By: Tomas Adam; Ales Michl; Michal Skoda
    Abstract: This paper discusses the implications of possible changes in the composition of the Czech National Bank's foreign exchange reserves, which are large by international standards and account for about 98% of the CNB's assets and are thus crucial for its earnings. Starting from the allocation as of October 31, 2022, we test how the risk-return characteristics change under the following three hypotheses: (i) increasing the share of equities from about 18% to, for example, 20%, (ii) increasing the amount of gold to, for example, 100 tons (from about 0.5% to 4.5% of the reserves), (iii) reducing the share of euro-denominated assets from 46% to, for example, 40%. The results suggest that if asset prices followed the pattern of the last 20 years, increasing the share of equities to 20% would increase the expected return on the portfolio, while the volatility would increase only slightly. Next, increasing the amount of gold to 100 tons could increase the expected return on the portfolio, while its volatility, measured in Czech koruna, would decrease. Reducing the share of euro-denominated assets, on the other hand, could slightly increase the expected return on the portfolio but could also significantly increase the volatility of the returns measured in Czech koruna, and is therefore not appropriate.
    Keywords: Central bank finances, foreign exchange reserves, foreign exchange reserve management, portfolio choice
    JEL: E44 E58 F31 G11
    Date: 2022–09
  10. By: Carlos Carvalho; Andrea Ferrero; Felipe Mazin; Fernanda Nechio
    Abstract: We explore the implications of demographic trends for the evolution of real interest rates across countries and over time. To that end, we develop a tractable three-country general equilibrium model with imperfect capital mobility and country-specific demographic trends. We calibrate the model to study how low-frequency movements in a country's real interest rate depend on its own and other countries' demographic factors, given a certain degree of financial integration. The more financially integrated a country is, the higher the sensitivity of its real interest rate to global developments is, and the less its own real rate determinants matter. We then estimate panel error correction models relating real interest rates to many of its possible determinants-demographics included-imposing some restrictions motivated by lessons from our structure model. Results corroborate the importance of accounting for time-varying financial integration, and show global factors and life expectancy are relevant determinants of real interest rates.
    Keywords: life expectancy; population growth; demographics; real interest rates; neutral rate; capital flows; secular stagnation
    JEL: E52 E58 J11 A11
    Date: 2023–10–24
  11. By: Wojewska, Aleksandra; Staritz, Cornelia; Tröster, Bernhard
    Abstract: Despite frequent debates on commodity prices, limited attention has been paid to the processes, strategies and practices through which commodity prices are 'made' and related institutions and infrastructures. 'World commodity prices' are not passively 'discovered' but are outcomes of contested price-making processes. This paper assesses how prices are determined and how they are set along global production networks (GPNs) for the critical metals copper, cobalt and lithium that are undergoing shifts in the context of green transitions. Conceptually, we link concepts of extractive industries in GPNs with sociological approaches to price-making and an infrastructural perspective. While the London Metal Exchange (LME) has been the established price-determination institution for copper and a leading price reporting agency (PRA) benchmark exists for cobalt, there is contestation between PRAs to become the dominant benchmark for lithium with the potential emergence of digital trading platforms. These differences are explained by particular materialities of metals and territorialities of their networks interrelated with historically developed production and organizational structures and powerful physical as well as financial actors' interests. There are however ongoing struggles within and between price-determination institutions. Generally, there is a trend to more short-term benchmarks linked to derivative markets, driven by financial actors' interest in getting exposure to metal price developments and financialization processes at the LME. The related increased price volatility has uneven distributional consequences along GPNs and is problematic for actors with limited access to price risk management. Methodologically, the paper is based on trade and financial data and semi-structured interviews with price-determination institutions and GPN actors.
    Keywords: price-making, global production networks, critical minerals, financialization, commodity derivative markets
    Date: 2023
  12. By: Fatih Yilmaz; Fahad A. Alswaina; Fateh Belaid; Mohamad Hejazi; Mari Luomi (King Abdullah Petroleum Studies and Research Center)
    Abstract: This study aims to assess the alignment of global sustainable financial flows with transition investment priorities. First, we identify investment gaps based on the difference between the required annual investment to meet global net-zero emissions (NZE) targets and current investment flows. Our assessment reveals that nearly all countries must significantly accelerate their efforts, as their current investment levels fall short of what is required. Second, and perhaps more importantly, investment gaps are particularly large for non-Annex I (developing) countries. Financing these large-scale investments continues to be a major global challenge. The size of global environmental, social and governance (ESG) finance remains low. Specifically, despite their large investment gaps, developing countries receive only a minor share of global ESG funds, where access to conventional finance is already limited.
    Keywords: Carbon, Carbon capture and storage, Carbon neutrality
    Date: 2023–10–09

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