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on International Finance |
| By: | Ambrocio, Gene; Hasan, Iftekhar; Li, Xiang |
| Abstract: | We study the implications of forging stronger political ties with the US on the sensitivities of stock returns around the world to a global common factor - the global financial cycle. Using voting patterns at the United Nations as a measure of political ties with the US along with various measures of the global financial cycle, we document evidence indicating that stronger political ties with the US amplify the sensitivities of stock returns in developing countries to the global financial cycle. We explore several channels and find that a deepening of financial linkages along with a reduction in information asymmetries and an amplification of sentiment are potentially important factors behind this result. |
| Keywords: | Political Ties, Global Financial Cycle, International Spillovers, Stock returns |
| JEL: | E44 F30 F50 G15 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bofrdp:281065&r=ifn |
| By: | Ahmed Ahmed; Boris Hofmann; Martin Schmitz |
| Abstract: | This paper uses security-level data of euro area investment funds' bond holdings to analyze their reaching for yield in the US dollar bond market. We find that they rebalance their US dollar bond portfolios toward higher yielding, riskier bonds when US monetary policy tightens, reflecting the effects of foreign exchange hedging. The effect is driven by the practice of hedging currency risk through rolling short-term hedging contracts. This gives rise to an erosion of the hedged yield earned on US dollar bonds when US monetary policy tightens and hedging costs increase, inducing reaching for yield in order to bolster portfolio returns. The hedging channel of monetary transmission is diametrically opposed to the classical risk-taking channel operating through US dollar-based investors, where a monetary tightening is associated with less reaching for yield. We further find that the US dollar bond purchases by euro area investment funds induced by their reaching for yield have meaningful effects on bond prices, implying that they affect conditions in the US dollar bond market. |
| Keywords: | monetary policy, foreign institutional investors, FX hedging, US dollar bond market |
| JEL: | E43 E52 G11 G12 G15 G23 |
| Date: | 2023–12 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:1153&r=ifn |
| By: | Yusuf Soner Baskaya; Ilhyock Shim; Philip Turner |
| Abstract: | Using quarterly data on macroprudential policy (MaPP) measures and capital flow management measures (CFMs) taken by 39 economies in 2000–2013, we analyse how domestic credit and cross-border capital flows respond to such measures. In doing so, we take a granular approach by considering price-based and quantity-based MaPP measures and CFMs, and also examine if the level of financial development matters in explaining policy effectiveness. We find that quantity-based MaPP measures significantly affect total credit and its components such as domestic bank credit, corporate credit and housing credit, but that the effects fade away beyond a certain level of financial development, suggesting that highly developed financial markets provide opportunities to circumvent MaPP measures imposed on banks. We also find that both price- and quantity-based CFMs are effective in slowing down bank inflows with the former effective at all levels of financial development and the latter effective at relatively high levels. Finally, we find some evidence on the existence of leakage effects. For example, tighter overall MaPP measures are associated with larger bond inflows, and tighter quantity-based MaPP measures with larger bank inflows. |
| Keywords: | bank lending, capital flow management measures, cross-border capital flows, financial development, macroprudential policy |
| JEL: | F34 G15 G28 |
| Date: | 2024–01 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:1158&r=ifn |
| By: | Ingomar Krohn; Vladyslav Sushko; Witit Synsatayakul |
| Abstract: | This paper finds that trading by non-residents in an emerging financial market reinforces the existence of a momentum anomaly, in an apparent violation of an efficient market hypothesis. Using detailed order flow data in Thai foreign exchange, equity, and fixed income markets, we find that foreign investors engage in momentum trading, which amplifies positive feedback between returns and order flow across all asset classes. Innovations in foreign investor order flow are informative of future returns, but the information is not based on local macro fundamentals. Local financial investors tend to mimic foreign investor trading, reinforcing returns to momentum, while non-financial investors consistently provide liquidity. Further tests suggest that the returns to momentum trading are time-varying and are positively related to the amount of foreign capital flowing into the local financial market. Taken together, the results indicate that a significant presence of foreign investors can alter the trading behaviour of local investors and can reduce the importance of local fundamentals in driving asset prices. |
| Keywords: | international financial markets, heterogeneous trading, disaggregated order flow, foreign investors, emerging markets |
| JEL: | F30 G11 G14 G15 |
| Date: | 2023–12 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:1154&r=ifn |
| By: | Khan, Haider |
| Abstract: | Abstract: Dedollarization is accelerating. Inter alia, the US-led western sanctions have accelerated the thinking about dedollarization and some tentative actions in the BRICS countries in particular. Further expansion of BRICS has strengthened these tendencies. With support from the other countries in the Global South, dedollarization will receive continuing impetus. It is one of the main theses of this paper that eventually the US will be forced to settle down to its substantial but reduced role in the Global Economy while a multipolar order replaces the brief ---in historical terms--- the dollar-based US hegemony during the cold war and dollar dominance during the unipolar two decades from 1991 to 2010. However, the pace of this evolution will depend on international politics and strategic foreign policy moves by the major powers and coalitions in both the Global North and the Global South. Thus a historical nodal point has arisen with the advent of the tragic war in Ukraine and the US hostilities towards China. The sanctions regimes of the US-led Global North have compounded the instabilities in the existing system. As the world system moves towards multipolarity, an opportunity exists for the Global South to construct through partial delinking from the post WW2 financial architecture under US hegemony. Construction of an expanded BRICS-led supra regional financial architecture along with regional financial architectures will be a strategic step forward. Within two decades dedollarization will become a reality. Finally, a new non-aligned movement and construction of genuinely pro-people development programs can also become a reality. |
| Keywords: | Dedollarization, Regional and Cross-Regional Financial Architectures, New Global Financial Architecture, CBDCs, Ukraine, multipolarity, BRICS, expanded BRICS or BRICS-plus, China, Russia, The Global South |
| JEL: | E58 F33 F50 |
| Date: | 2023–12–21 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:119544&r=ifn |
| By: | Stefano Carattini; Giseong Kim; Givi Melkadze; Aude Pommeret |
| Abstract: | Ambitious climate policy, coupled with financial frictions, has the potential to create macrofinancial stability risk. Such stability risk may expand beyond the economy implementing climate policy, potentially catching other countries off guard. International spillovers may occur because of trade and financial channels. Hence, we study the design and effects of climate policies in the world economy with international trade and financial flows. We develop a two-sector, two-country, dynamic general equilibrium model with financial frictions, climate policies, including carbon tariffs, and macroprudential policies. Using the calibrated model, we evaluate spillovers from unilateral domestic carbon pricing to foreign economies and back. We also examine more ambitious climate architectures involving carbon tariffs or a global carbon price. We find that accounting for cross-border financial flows and frictions in credit markets is crucial to understand the effects of climate policies and to guide the implementation of macroprudential policies at the global scale aimed at minimizing transition risk and paving the way for ambitious climate policy. |
| Keywords: | financial frictions, carbon tax, carbon tariffs, open economy |
| JEL: | E44 E58 F38 F42 G18 Q58 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_10851&r=ifn |
| By: | McCully, Tuuli |
| Abstract: | The paper focuses on China's onshore bond market and the drivers of non-resident net portfolio flows into Chinese debt securities. Building on a theoretical model of push and pull factors as a foundation for the empirical analysis on drivers of bond flows into China, static and time-varying models are estimated to explain the importance of various push and pull factors in the context of China's bond market development. While China-specific pull factors, such as domestic economic growth prospects and asset returns, are important drivers of bond flows, the results reveal that global push factors, such as US interest rates and investor risk aversion, have recently gained significance as drivers of flows into China. This shift goes hand in hand with China's gradual bond market liberalization measures. The findings confirm China's continued bond market deepening and integration with the rest of the world. |
| Keywords: | capital flows, portfolio flows, push factors, pull factors, financial openness |
| JEL: | F32 F34 F36 F41 G11 G28 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bofitp:280981&r=ifn |
| By: | Deyan Radev (Sofia University, Faculty of Economics and Business Administration) |
| Abstract: | In this study, we explore the impact of solvency and wholesale funding shocks on the lending behavior of 84 OECD parent banks and their 375 foreign subsidiaries. Our findings indicate that solvency shocks play a more significant role than wholesale funding shocks in influencing subsidiary lending. Moreover, we observe that solvency shocks have a heightened impact on larger subsidiary banks operating in mature markets with limited growth opportunities. These results carry substantial theoretical and policy implications, contributing to a deeper understanding of how solvency and wholesale shocks traverse borders and affect the lending dynamics of global banking entities. |
| Keywords: | Commercial banks, global banks, wholesale shocks, solvency shocks, transmission, internal capital markets |
| JEL: | G01 G21 G28 |
| Date: | 2024–01 |
| URL: | http://d.repec.org/n?u=RePEc:sko:wpaper:bep-2024-02&r=ifn |
| By: | Bryan Kelly (Yale School of Management); Semyon Malamud (Ecole Polytechnique Fédérale de Lausanne, Swiss Finance Institute, and CEPR); Mohammad Pourmohammadi (University of Geneva and Swiss Finance Institute); Fabio Trojani (University of Geneva, University of Turin and Swiss Finance Institute) |
| Abstract: | We introduce a novel shrinkage methodology for building optimal portfolios in environments of high complexity where the number of assets is comparable to or larger than the number of observations. Our universal portfolio shrinkage approximator(UPSA) is derived in closed form, is easy to implement, and dominates other existing shrinkage methods. It exhibits an explicit two-fund separation, optimally combining Markowitz with a complexity correction. Instead of annihilating the low-variance principal components, UPSA weights them efficiently. Contrary to conventional wisdom, low in-sample variance principal components (PCs) are key to out-of-sample model performance. By optimally incorporating them into portfolio construction, UPSA produces a stochastic discount factor that significantly dominates its PC-sparse counterparts. Thus, PC-sparsity is just an artifact of inefficient shrinkage. |
| Date: | 2023–12 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp23119&r=ifn |
| By: | Kim, Ki-Dong; Shim, Gyuhun; Choi, Hyun-Im; Kim, Dong-Hyun |
| Abstract: | This study provides novel insights into the policy effects of timber legality verification methods, specifically Due-diligence (under the European Union Timber Regulation (EUTR)) and Due-care (under the Lacey Act), on coniferous and non-coniferous lumber trade, highlighting their significance in the context of global lumber trade. Timber legality verification plays a pivotal role in the global timber trade. We comprehensively assess the impact of verification methods on coniferous and non-coniferous lumber trade, utilizing two decades of trade data (1997–2017) across approximately 160 countries. We employ the difference-in-differences method based on the gravity model of international trade, utilizing robust export–import data and demographic profiles. Our findings demonstrate that the effect of EUTR on coniferous lumber imports ranged between −0.32% and −0.05%, and that on non-coniferous lumber imports ranged between −0.44% and −0.05%, whereas the effect of the Lacey Act on coniferous lumber imports ranged between −0.93% and −0.09%. Non-coniferous lumber imports remained unaffected. The Voluntary Partnership Agreement (VPA) led to decreased exports to the EU and US. Our findings hold two key implications. First, Due-diligence exhibits more consistent policy effects than Due-care. Second, supporting VPA-participating countries is crucial for facilitating timber trade. These insights inform timber trade policies and sustainable practices. |
| Keywords: | timber legality requirement system; lumber trad; VPA; gravity model; difference-in-difference |
| JEL: | R14 J01 |
| Date: | 2023–11–13 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:121106&r=ifn |
| By: | Guter-Sandu, Andrei; Haas, Armin; Murau, Steffen |
| Abstract: | The Green Transition to net-zero carbon emissions in Europe requires massive financing efforts, with estimates of 620 billion EUR annually, but the headwinds are substantive. Central banks seem overstretched and busy tightening to combat inflation; treasuries are subject to austerity-inducing fiscal rules; and banking systems are afflicted by non-performing loans, fragmentation, and risk aversion. We employ the framework of ‘monetary architecture’ to analyse the EU’s monetary and financial system as a constantly evolving hierarchical web of interlocking balance sheets and study its capacity to find ‘elasticity space’ to meet the financing challenge. To this end, we draw on a four-step scheme for green macro-financial governance along the financial cycle of balance sheet expansion, funding, and final contraction. We find that, first, Europe’s monetary architecture still has ample elasticity space to provide a green initial expansion due to its developed ecosystem of national, subnational, and supranational off-balance-sheet fiscal agencies. Second, as mechanisms lack to consciously organise the distribution of long-term debt instruments across different segments, its capacity to provide long-term funding is limited. Third, institutional transformation in the last two decades have greatly improved the capacity of the European monetary architecture to counteract financial instability by providing emergency elasticity. Fourth, the capacity of the European monetary architecture to manage a final contraction of balance sheets is limited, which is a general quandary in modern credit money systems. Our analysis points to the need for further investigations into techniques for monetary architectures to manage long-term funding and balance sheet contractions. |
| Date: | 2023–12–23 |
| URL: | http://d.repec.org/n?u=RePEc:osf:socarx:4mb2q&r=ifn |
| By: | Blanga-Gubbay, Michael; Rubínová, Stela |
| Abstract: | This paper explores the dynamic relationships between foreign direct investment (FDI), international trade, and economic development. First, emphasizing the pivotal role of multinational enterprises (MNEs) - particularly in the context of Global Value Chains (GVCs) - it underscores how FDI and trade are mutually reinforcing. Then, it highlights the convergence of investment and trade policies, pointing out the impact of Bilateral Investment Treaties (BITs) on trade flows and the increasing inclusion of investment provisions in Regional Trade Agreements (RTAs). Third, examining global FDI trends, it shows that developing and emerging economies are still lagging behind, but they are fast growing in importance. Finally, it draws on a rich empirical literature to show how FDI drives economic development through knowledge spillovers, technology transfer, and export upgrading. |
| Keywords: | foreign direct investment, international trade, economic development |
| JEL: | F21 F23 O19 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:wtowps:280986&r=ifn |
| By: | Estrin, Saul (London School of Economics); Khavul, Susanna (San Jose State University); Kritikos, Alexander S. (DIW Berlin); Löher, Jonas (IfM Bonn) |
| Abstract: | Financing entrepreneurship spurs innovation and economic growth. Digital financial platforms that crowdfund equity for entrepreneurs have emerged globally, yet they remain poorly understood. We model equity crowdfunding in terms of the relationship between the number of investors and the amount of money raised per pitch. We examine heterogeneity in the average amount raised per pitch that is associated with differences across three countries and seven platforms. Using a novel dataset of successful fundraising on the most prominent platforms in the UK, Germany, and the USA, we find the underlying relationship between the number of investors and the amount of money raised for entrepreneurs is loglinear, with a coefficient less than one and concave to the origin. We identify significant variation in the average amount invested in each pitch across countries and platforms. Our findings have implications for market actors as well as regulators who set competitive frameworks. |
| Keywords: | equity crowdfunding, soft information, entrepreneurship, finance, financial access and inclusion |
| JEL: | D26 G23 G41 L26 |
| Date: | 2023–12 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp16679&r=ifn |