nep-ifn New Economics Papers
on International Finance
Issue of 2024‒01‒22
eleven papers chosen by
Jiachen Zhan, University of California,Irvine

  1. The green sin: How exchange rate volatility and financial openness affect green premia By Moro, Alessandro; Zaghini, Andrea
  2. Similarities yet divergence in South Asian macroeconomic performance By Ashima Goyal
  3. What Drives the Exchange Rate? By Oleg Itskhoki; Dmitry Mukhin
  4. Cross-Currency Heath-Jarrow-Morton Framework in the Multiple-Curve Setting By Alessandro Gnoatto; Silvia Lavagnini
  5. India's exchange rate regime under inflation targeting By Ashima Goyal
  6. Does it matter if the Fed goes conventional or unconventional? By Marcin Kolasa; Grzegorz Wesołowski
  7. Financial Integration and Monetary Policy Coordination By Javier Bianchi; Louphou Coulibaly
  8. Market-Adaptive Ratio for Portfolio Management By Ju-Hong Lee; Bayartsetseg Kalina; KwangTek Na
  9. High Frequency Trading and Stock Herding By Fu, Servanna Mianjun; Kellard, Neil; Verousis, Thanos; Kalaitzoglou, Iordanis
  10. Assessing the Impact of Infrastructure Investments Using Customs Data: The Case of the Greater Mekong Subregion Corridor and the People’s Republic of China By Elhan-Kayalar, Yesim; Kucheryavyy, Konstantin; Nose, Manabu; Sawada, Yasuyuki; Shangguan, Ruo
  11. Belgium: Financial Sector Assessment Program-Detailed Assessment of Observance-Assessment of the CPSS–IOSCO Principles for Financial Market Infrastructures Euroclear Bank By International Monetary Fund

  1. By: Moro, Alessandro; Zaghini, Andrea
    Abstract: We propose a model with mean-variance foreign investors who exhibit a convex disutility associated to brown bond holdings. The model predicts that bond green premia should be smaller in economies with a closer financial account and highly volatile exchange rates. This happens because foreign intermediaries invest relatively less in such economies, and this lowers the marginal disutility of investing in polluting activities. We find strong empirical evidence in favor of this hypothesis using a global bond market dataset. Exchange rate volatility and financial account openness are thus able to explain the higher financing costs of green projects in emerging markets relative to advanced economies, especially when green bonds are denominated in local currency: a disadvantage that we can call the "green sin" of emerging economies.
    Keywords: Green bonds, Greenium, Exchange rate volatility, Financial openness, Original sin
    JEL: F21 F30 F31 G11 G12
    Date: 2023
  2. By: Ashima Goyal (Indira Gandhi Institute of Development Research)
    Abstract: Stylized business cycle facts for South Asia are similar and differ from other regions. They show the dominance of supply shocks, often amplified by macroeconomic policies and procyclical current accounts. Interest and exchange rate volatility rose initially on liberalization, but fell as markets deepened. A gradual middling through approach to openness and market development with flexible exchange rates worked well initially. But a combination of excessive government/foreign borrowing and inadequate reserves made it difficult for smaller countries to withstand the multiple external shocks that began with the global pandemic. Domestic ability to smooth shocks and global safety nets are both essential. India benefitted from growing diversity, evolution to countercyclical macroeconomic policy better suited to structure, a good coordination of monetary and fiscal policies with balance between demand stimulus and continuing supply-side reforms. Reserves and capital flow management policies helped insulate from global shocks. Intervention damped excess exchange rate volatility reducing risk premiums.
    Keywords: South Asia, supply shocks, flexible exchange rates, diversity, smoothing
    JEL: E3 E63 O11
    Date: 2023–12
  3. By: Oleg Itskhoki; Dmitry Mukhin
    Abstract: We use a general open-economy wedge-accounting framework to characterize the set of shocks that can account for major exchange rate puzzles. Focusing on a near-autarky behavior of the economy, we show analytically that all standard macroeconomic shocks — including productivity, monetary, government spending, and markup shocks — are inconsistent with the broad properties of the macro exchange rate disconnect. News shocks about future macroeconomic fundamentals can generate plausible exchange rate properties. However, they show up prominently in contemporaneous asset prices, which violates the finance exchange rate disconnect. International shocks to trade costs, terms of trade and import demand, while potentially consistent with disconnect, do not robustly generate the empirical Backus-Smith, UIP and terms-of-trade properties. In contrast, the observed exchange rate behavior is consistent with risk-sharing (financial) shocks that arise from shifts in demand of foreign investors for home-currency assets, or vice versa.
    JEL: F31 F41 F44
    Date: 2023–12
  4. By: Alessandro Gnoatto; Silvia Lavagnini
    Abstract: We provide a general HJM framework for forward contracts written on abstract market indices with arbitrary fixing and payment adjustments. We allow for indices on any asset class, featuring collateralization in arbitrary currency denominations. The framework is pivotal for describing portfolios of interest rate products which are denominated in multiple currencies. The benchmark transition has created significant discrepancies among the market conventions of different currency areas: our framework simultaneously covers forward-looking risky IBOR rates, such as EURIBOR, and backward-looking rates based on overnight rates, such as SOFR. In view of this, we provide a thorough study of cross-currency markets in the presence of collateral, where the cash flows of the contract and the margin account can be denominated in arbitrary combinations of currencies. We finally consider cross-currency swap contracts as an example of a contract simultaneously depending on all the risk factors that we describe within our framework.
    Date: 2023–12
  5. By: Ashima Goyal (Indira Gandhi Institute of Development Research)
    Abstract: While the basic exchange rate regime has stayed the same since the liberalizing reforms of the nineties, its implementation has varied over the years. The paper assesses the evolution of India's nominal exchange rate regime and its suitability under inflation targeting. It also examines the evolving impact on trade, inflation, on currency and financial markets, country risk premium and the cost of borrowing. The analysis suggests a flexible exchange rate with intervention to prevent excess volatility as well as misalignment from competitive real exchange rates, while allowing some volatility to aid price discovery in foreign exchange markets, would work best in inflation targeting emerging markets.
    Keywords: India, exchange rate regime, capital flows, inflation targeting
    JEL: F41 F31 E52
    Date: 2023–12
  6. By: Marcin Kolasa (SGH Warsaw School of Economics; International Monetary Fund); Grzegorz Wesołowski (University of Warsaw, Faculty of Economic Sciences)
    Abstract: We investigate the domestic and international consequences of three types of Fed monetary policy instruments: conventional interest rate (IR), forward guidance (FG) and large scale asset purchases (LSAP). We document empirically that they can be seen as close substitutes when used to meet macroeconomic stabilization objectives in the US, but have markedly different spillovers to other countries. This is because each of the three monetary policy instruments transmits differently to asset prices and exchange rates of small open economies. The LSAP by the Fed lowers the term premia both in the US and in other countries, and results in bigger exchange rate adjustments compared to conventional policy. Importantly for international spillovers, LSAP is typically associated with a more accommodative reaction of other countries' monetary authorities, especially in emerging market economies. We demonstrate how these findings can be rationalized within a stylized dynamic theoretical framework featuring a simple form of international bond market segmentation.
    Keywords: monetary policy, forward guidance, quantitative easing, international spillovers
    JEL: E44 E52 F41
    Date: 2024
  7. By: Javier Bianchi; Louphou Coulibaly
    Abstract: Financial integration generates macroeconomic spillovers that may require international monetary policy coordination. We show that individual central banks may set nominal interest rates too low or too high relative to the cooperative outcome. We identify three sufficient statistics that determine whether the Nash equilibrium exhibits under-tightening or over-tightening: the output gap, sectoral differences in labor intensity, and the trade balance response to changes in nominal rates. Independently of the shocks hitting the economy, we find that under-tightening is possible during economic expansions or contractions. For large shocks, the gains from coordination can be substantial.
    JEL: E21 E23 E43 E44 E52 E62 F32
    Date: 2023–12
  8. By: Ju-Hong Lee; Bayartsetseg Kalina; KwangTek Na
    Abstract: This paper explores the limitations of existing risk-adjusted returns in portfolio management and introduces a novel metric, the Market-adaptive ratio, to address these shortcomings. Existing risk-adjusted returns neglect the differences between bear and bull markets. Acknowledging that these market conditions demand distinct strategies, the Market-adaptive ratio incorporates the unique attributes of each, enhancing the portfolio performance. By emphasizing the significance of market type in impacting investment outcomes, this novel metric empowers investors to refine their strategies accordingly.
    Date: 2023–12
  9. By: Fu, Servanna Mianjun; Kellard, Neil; Verousis, Thanos; Kalaitzoglou, Iordanis
    Abstract: Using Trade and Quote (TAQ) data to infer variation in High frequency Trading (HFT) for the US equity markets and HFT start and colocation dates for a sample of 10 international exchanges, we find that increases in HFT activity lead to a significant increase in stock herding. The effect of HFT on herding is more pronounced for large-cap stocks, higher liquidity periods and during more volatile days. HFT activities are strongly associated with non-fundamental herding and encourage information cascades that induce price inefficiencies, suggesting changes to market design might be warranted.
    Keywords: High Frequency Trading; HFT; Herding; Colocation; Information cascades; Fundamental information
    Date: 2024–01–03
  10. By: Elhan-Kayalar, Yesim (Asian Development Bank); Kucheryavyy, Konstantin (University of Tokyo); Nose, Manabu (International Monetary Fund); Sawada, Yasuyuki (University of Tokyo); Shangguan, Ruo (Jinan University)
    Abstract: This paper provides new evidence of the effects of road construction on both domestic and international trade flows in the People’s Republic of China (PRC) using customs data and information on transport investments in the region, including those supported by multilateral development banks. We find that road construction helped to reduce trade costs significantly from 2000 to 2011, supporting the catch-up of inland regions in the PRC to its coastal cities. The ad valorem rate of internal trade costs decreases by 20%, and the ad valorem rate of international trade costs decreases, on average, by 15.3%, with substantial heterogeneity of effects across sectors. Using satellite and customs data, we also document that the construction of the Kunming–Bangkok Expressway led to local economic growth and higher regional specialization in accordance with comparative advantage, suggesting the role of the road construction in facilitating market integration across borders in the Greater Mekong Subregion.
    Keywords: development impact; infrastructure; economic growth; trade; job creation; regional specialization; market integration
    JEL: F10 F13 R40 R41
    Date: 2023–12–20
  11. By: International Monetary Fund
    Abstract: Euroclear Bank (EB) is a large and highly interconnected international central securities depository (ICSD) that provides critical services for global financial markets. EB, domiciled in Belgium, issues and provides custody and settlement services for international bonds (i.e., Eurobonds) in its capacity as an ICSD. It shares this role primarily with Clearstream Banking Luxembourg (CBL). EB also settles and holds in custody a wide range of domestic and internationally traded securities. In December 2019, EB was authorized under the Central Securities Depository Regulation (CSDR) of the European Union (EU) to perform so-called core CSD services, as well as non-banking- and banking-type ancillary services. EB is also licensed as a credit institution under the Belgian Banking Act. To facilitate smooth settlement, EB provides uncommitted credit facilities to its participants on an intraday and fully collateralized basis. In 2021, the value of securities held on EB’s books was EUR 17.1 trillion and it had settlement turnover of 147 million transactions with a value of EUR 653 trillion. This makes EB the most active CSD in the world (by settlement turnover), as well as the largest ICSD and third largest CSD in the world (by value of securities held).
    Date: 2023–12–08

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