nep-ifn New Economics Papers
on International Finance
Issue of 2024‒03‒18
ten papers chosen by
Jiachen Zhan, University of California,Irvine

  1. The Feldstein-Horioka Puzzle or Paradox after 44 Years: A Fallacy of Composition By Charles Yuji Horioka
  2. Invoice Currency Choice in Intra-Firm Trade: A Transaction-Level Analysis of Japanese Automobile Exports By Taiyo Yoshimi; Uraku Yoshimoto; Kiyotaka Sato; Takatoshi Ito; Junko Shimizu; Yushi Yoshida
  3. The euro in a world of dollar dominance: Between strategic autonomy and structural weakness By Tokarski, Paweł
  4. On the effect of investment disputes on bilateral portfolio investment in emerging markets By Nauerth, Jannik A.
  5. Uninsurable Income Risk and the Welfare Effects of Reducing Global Imbalances By Ayse Dur; Andrew Glover; Jacek Rothert
  6. Exchange rate shocks and equity prices: the role of currency denomination By Dr. Romain Baeriswyl; Alex Oktay; Dr. Marc-Antoine Ramelet
  7. The performance of household-held mutual funds: evidence from the euro area By Valerio Della Corte; Raffaele Santioni
  8. Currency risk premiums redux? By Federico C. Nucera; Lucio Sarno; Gabriele Zinna
  9. Bilateral investment treaties and portfolio investment By Eichler, Stefan; Nauerth, Jannik A.
  10. The external financial spillovers of CBDCs By Alessandro Moro; Valerio Nispi Landi

  1. By: Charles Yuji Horioka (Research Institute for Economics and Business Administration, Kobe University, Asian Growth Research Institute, Institute of Social and Economic Research, Osaka University, JAPAN, School of Economics, University of the Philippines, Diliman, PHILIPPINES, and National Bureau of Economic Research, JAPAN)
    Abstract: The finding of Feldstein and Horioka (1980) that domestic saving and domestic investment are highly correlated across countries despite the rapid globalization and liberalization of financial markets in recent decades has been regarded as a Puzzle or Paradox. However, in this paper, we show that countries as a whole may not be able to transfer their capital abroad and that the Feldstein-Horioka Finding of domestic saving and domestic investment being highly correlated across countries may arise even if there are no frictions in financial markets and even if individual investors can freely transfer their capital abroad if there are frictions in goods markets such as transport costs, tariffs, nontariff barriers, the cost of regulatory compliance, etc. In fact, there is evidence that frictions in goods markets are a more serious impediment to countries as a whole being able to transfer their capital abroad than frictions in financial markets, especially in the short run.
    Keywords: Capital controls; Fallacy of composition; Feldstein-Horioka finding; Feldstein-Horioka Puzzle or Paradox; Frictions in financial markets; Frictions in goods markets; Global interest rate; Globalization and liberalization of financial markets; Interest parity; Interest rate equalization; International capital flows; International capital mobility; Saving-investment correlations; Saving retention coefficient; Trade costs; Trade frictions
    JEL: F15 F21 F32 F36 F41 G15
    Date: 2024–02
  2. By: Taiyo Yoshimi; Uraku Yoshimoto; Kiyotaka Sato; Takatoshi Ito; Junko Shimizu; Yushi Yoshida
    Abstract: This study empirically investigates how the invoice currency choice differs between intra-firm and arm’s-length exports. We also examine whether other firm- and product-level characteristics affect the choice of invoice currency. This study is the first to be granted access to highly disaggregated transaction-level trade data for Japan. Focusing on Japanese automobile exports to France, we demonstrate that the importer’s currency tends to be chosen in intra-firm export invoicing based on a panel logit estimation. Our empirical findings remain robust when different types of intra-firm export variables and other conventional explanatory variables are introduced, such as firm and product market share, exchange rate volatility, euro-invoiced imports, labor productivity, and research and development intensity. Given growing intra-firm trade and expanding global value chains, Japanese parent firms tend to invoice in the importers’ currency, assuming the foreign exchange risk that arises from intra-firm trade. Thus, exchange rate risk management is a significant consideration for Japanese parent firms.
    JEL: F14 F30 F31
    Date: 2024–02
  3. By: Tokarski, Paweł
    Abstract: The inquiry into the global significance of the euro, which is the second most important currency in the international financial system after the US dollar (hereinafter, the dollar), should be treated as a priority in efforts to strengthen the EU's strategic autonomy. The main obstacles impeding the further internationalisation of the euro include the lack of a sovereign behind it and the heterogeneity and structural problems of the euro area member states. The international status of the euro can be actively improved by strengthening its role in the green transformation as well as in the further deepening and integration of the financial markets in Europe - and by promoting the 'digital euro' project. The current trends of growing geopolitical rivalry, digitalisation, and the rise of platform companies in the global economy will steer the international financial system towards greater regionalisation.
    Keywords: euro, euro area, currency, dollar, international financial system, geopolitical rivalry, digitalisation, platform companies
    Date: 2024
  4. By: Nauerth, Jannik A.
    Abstract: This paper investigates the effect of arbitral proceedings on bilateral portfolio equity investments in emerging markets. Investment disputes may deter foreign investors as they reveal a government's poor behavior towards foreign investors. The analysis investigates the effects of the first initiation of arbitral proceedings, the first outcome in favor of the investor, and the first outcome in favor of the respondent state of arbitration proceedings. The database is an unbalanced panel of 55 home and 36 host countries from 2001 to 2018. Estimations do not reveal an unconditionally significant effect of arbitral proceedings on bilateral portfolio equity holdings. The impact becomes significant considering the interplay with bilateral investment treaties and political risk.
    Keywords: Investment disputes, Arbitration proceeding, Bilateral portfolio investment, Bilateral investment treaty, Investment protection, Emerging markets
    JEL: F32 F53 G15 K33
    Date: 2023
  5. By: Ayse Dur; Andrew Glover; Jacek Rothert
    Abstract: We highlight the welfare effect of policies that balance global current accounts when households face uninsurable income risk and borrowing constraints. Subsidizing savings in debtor economies reduces current account imbalances and raises the welfare of almost all citizens by increasing world capital, raising wages, and improving insurance for low-wealth households. The same balancing of current accounts is achieved by taxing savings in lender economies; however, this policy hurts most households by reducing global capital. These results suggest that balancing global imbalances may be a positive byproduct of raising investment rates, especially in debtor countries.
    Keywords: global imbalances; incomplete markets; heterogeneity
    JEL: E2 E44 F32 F36 F4
    Date: 2024–02–14
  6. By: Dr. Romain Baeriswyl; Alex Oktay; Dr. Marc-Antoine Ramelet
    Abstract: We find that the response of stock prices to the exchange rate reflects a currency denomination effect—that is, a change in the relative international value of firms’ cash flows and equity—rather than a change in domestic economic conditions. To do so, we compute exogenous movements for the Swiss franc on SNB announcement days and trace their effects on Swiss stocks. Exploiting firm heterogeneity reveals that the prices of stocks with foreign-denominated cash flows are considerably more sensitive to the exchange rate. Using the staggered introduction of American Depositary Receipts in Switzerland, we provide causal evidence that cross-listing markedly amplifies the sensitivity of domestic stock prices to exchange rate fluctuations, consistent with the law of one price. Stock market movements that follow central bank announcements should therefore be interpreted with caution because they partially reflect parity movements and not only economic information.
    Keywords: International asset pricing, Law of one price, Exchange rate shocks, Cross-listing
    JEL: F31 G12 G15
    Date: 2023
  7. By: Valerio Della Corte (Bank of Italy); Raffaele Santioni (Bank of Italy)
    Abstract: PMutual funds are a key investment vehicle for households, but past research has questioned the ability of less sophisticated retail investors to optimally select mutual funds. We provide further evidence on this topic by looking at a large sample of mutual funds held by euro-area households from 2009 to 2020. We document that mutual funds with lower participation by institutional investors tend to be more expensive and yield lower risk-adjusted returns, after controlling for many possible predictors of funds’ performance. The underperformance is especially pronounced for equity funds and within-fund over time, meaning that households tend to hold proportionally more funds at times when their risk-adjusted performance is inferior. Running flow-performance regressions, we find that household flows chase past returns rather than risk-adjusted returns and exhibit much stronger inertia than institutional investor flows, which may help explain why they earn lower risk-adjusted returns. Overall, our findings are consistent with models in which individual investors face significant search costs in the mutual funds market.
    Keywords: households finance, investment decisions, retail mutual funds
    JEL: G5 G14 G23
    Date: 2023–11
  8. By: Federico C. Nucera (Bank of Italy); Lucio Sarno (University of Cambridge - Judge Business School); Gabriele Zinna (Bank of Italy)
    Abstract: We study a large currency cross section using asset pricing methods which account for omitted-variable and measurement-error biases. First, we show that the pricing kernel includes at least three latent factors which resemble (but are not identical to) a strong U.S. "Dollar" factor, and two weak, high Sharpe ratio "Carry" and "Momentum" slope factors. Evidence for an additional "Value" factor is weaker. Second, using this pricing kernel, we find that only a small fraction of the over 100 nontradable candidate factors considered have a statistically significant risk premium – mostly relating to volatility, uncertainty and liquidity conditions, rather than macro variables.
    Keywords: : currency risk premiums, asset pricing, omitted factors, measurement error, weak factors
    JEL: F31 G12 G15
    Date: 2023–07
  9. By: Eichler, Stefan; Nauerth, Jannik A.
    Abstract: We analyze the effect of bilateral investment treaties (BITs) on bilateral foreign portfolio investment in equity and debt securities. We find that expropriation risk and the level of a BIT's investor protection are complementary. Applying a Poisson Pseudo-Maximum-Likelihood model to a panel of 60 home and 39 host countries from 2002 to 2017, we find that host countries receive 40% more bilateral equity investment when they protect foreign investors with a BIT. This effect almost doubles when investment protection of BITs is strong, and the political risk of the host country is high.
    Keywords: Bilateral investment treaties, Bilateral portfolio investment, Political risk, Investor protection, Emerging markets
    JEL: F32 G15 K33
    Date: 2024
  10. By: Alessandro Moro (Bank of Italy); Valerio Nispi Landi (Bank of Italy)
    Abstract: Using a DSGE model, we study the macroeconomic consequences of a foreign central bank digital currency (CBDC) being available to residents in a small open economy. We find that a gradual and permanent increase in domestic households' preference for a foreign CBDC leads to a structural reduction in economic activity, especially when the CBDC is designed to be similar to domestic deposits. Imposing capital flow management measures on outflows, relaxing macroprudential policy, or selling foreign reserves can help smooth the transition. A Taylor rule that targets PPI inflation is more effective in limiting the disruptive effects than CPI targeting or an exchange-rate peg. We also show that an economy with a large stock of foreign CBDC is better shielded from exogenous increases in the interest rate on foreign debt if the CBDC remuneration remains constant.
    Keywords: central bank digital currency, DSGE model, open economy macroeconomics, financial globalization
    JEL: E44 E58 F38 F41
    Date: 2023–07

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