nep-ifn New Economics Papers
on International Finance
Issue of 2024‒03‒25
eleven papers chosen by
Jiachen Zhan, University of California,Irvine

  1. The Role of Domestic and Foreign Sentiment for Cross-Border Portfolio Flows By Birru, Justin; Wynter, Matthew
  2. The US Equity Valuation Premium, Globalization, and Climate Change Risks By Stulz, Rene M.; Doidge, Craig; Karolyi, George Andrew
  3. Globalization and Profitability of US Firms: The Role of Intangibles By Bullipe R. Chintha; Ravi Jagannathan; Sri S. Sridhar
  4. Political uncertainty and currency markets By Markus Leippold; Felix Matthys; Philippe Mueller; Michal Svaton
  5. International Trade and Macroeconomic Dynamics with Sanctions By Fabio Ghironi; Daisoon Kim; G. Kemal Ozhan
  6. Pension Liquidity Risk By Kristy Jansen; Sven Klingler; Angelo Ranaldo; Patty Duijm
  7. Sectoral Debt and Global Dollar Cycles in Developing Economies By Bada Han; Rashad Ahmed; Joshua Aizenman; Yothin Jinjarak
  8. The Price of Money: The Reserves Convertibility Premium over the Term Structure By Kjell G. Nyborg; Jiri Woschitz
  9. Decomposing Large Banks’ Systemic Trading Losses By Radoslav Raykov
  10. An Integrated Policy Framework (IPF) Diagram for International Economics By Mr. Suman S Basu; Ms. Gita Gopinath
  11. European banks are not immune to national elections By Fungáčová, Zuzana; Kerola, Eeva; Weill, Laurent

  1. By: Birru, Justin (Ohio State U); Wynter, Matthew (Stony Brook U)
    Abstract: We show that sentiment influences the demand for foreign stocks, as identified by international portfolio flows between investors in the United States and investors in 44 other countries. We document two channels through which sentiment affects flows. First, inflows are higher to countries with higher sentiment. Second, higher sentiment in a given country is associated with lower outflows from that country to bilateral trade partners, suggesting that sentiment in one country can have spillover effects on demand for assets in other countries. The combined sentiment effects are associated with economically meaningful implications for net flows. Finally, we consider country closed-end funds and find evidence of pricing effects of sentiment.
    JEL: F30 F32 G11 G14 G15
    Date: 2023–05
  2. By: Stulz, Rene M. (Ohio State U and ECGI); Doidge, Craig (U of Toronto); Karolyi, George Andrew (Cornell U)
    Abstract: In the 2000s, US firms have higher valuations than comparable non-US firms listed only outside the US but not non-US firms cross-listed in the US. Though one would expect this US valuation premium to fall over time because of globalization, it widens for firms in developed markets by 36% and falls for firms in emerging markets by 20% after the global financial crisis of 2007-2008. This evolution is explained in part by the decreased valuation of brown firms in other developed countries relative to the US. Other potential explanations are explored and rejected.
    JEL: F21 F65 G10 G15 G34
    Date: 2023–09
  3. By: Bullipe R. Chintha; Ravi Jagannathan; Sri S. Sridhar
    Abstract: China's admission into the WTO in 2001 heralded a new era of globalization, increasing both import competition in domestic markets and foreign opportunities for US firms. In the aggregate, the average annual profitability of US public firms during the post globalization period (2003-2019) increased by 11.5% of the corresponding pre-globalization period (1984-2002) profitability. This increase in overall aggregate profitability was primarily driven by foreign profitability increasing by 47.4% for firms in the S&P 500 index, which are larger and have more intangible assets created by R&D and SG&A expenditures. In contrast, following globalization, the average aggregate domestic profitability of US firms remained flat, and firms employed more capital to generate sales. Firms with higher intangible assets benefited more from globalization.
    JEL: F20 F30 G0 G12 G30 L1 L25
    Date: 2024–03
  4. By: Markus Leippold (University of Zurich; Swiss Finance Institute); Felix Matthys (ITAM); Philippe Mueller (Warwick Business School Finance Group); Michal Svaton (University of Zurich - Department of Banking and Finance)
    Abstract: We study the impact of political uncertainty on exchange rates and the pricing of currency options. While we do not find clear directional patterns in exchange rates, option prices reflect the heightened political uncertainty around elections and referendums for a cross-section of 30 countries. In general, FX options whose lives span political events are more expensive, with the effect being even stronger for options that protect against domestic currency depreciation.
    Keywords: FX option pricing; Volatility and skewness; electoral systems; political uncertainty
    JEL: G14 G15 G13 F31 C58 D72
    Date: 2024–01
  5. By: Fabio Ghironi; Daisoon Kim; G. Kemal Ozhan
    Abstract: We study international trade and macroeconomic dynamics triggered by the imposition of sanctions. We begin with a tractable two-country model where Home and Foreign countries have comparative advantages in production of differentiated consumption goods and a commodity (e.g., gas), respectively. Home imposes sanctions on Foreign. Financial sanctions exclude a fraction of Foreign agents from the international bond market. Gas sanctions take the form of a ban on gas trade, equivalent to an appropriate price cap in our model. Differentiated goods trade sanctions exclude a fraction of Foreign and Home exporters from international trade. All sanctions lead to resource reallocation in both economies. Exchange rate movements reflect the direction of reallocation and the type of sanctions imposed rather than the success of the sanctions. Welfare analysis shows that gas sanctions are more costly for Home, while differentiated consumption goods trade sanctions are more costly for Foreign. A third country that refrains from joining the sanctions mitigates welfare losses in Foreign, but refraining from joining the sanctions is beneficial for the third country. These findings highlight the importance and the difficulty of international coordination when imposing sanctions.
    JEL: F31 F41 F42 F51
    Date: 2024–03
  6. By: Kristy Jansen (University of Southern California and De Nederlandsche Bank); Sven Klingler (BI Norwegian Business School); Angelo Ranaldo (University of St. Gallen; Swiss Finance Institute); Patty Duijm (De Nederlandsche Bank)
    Abstract: Pension funds rely on interest rate swaps to hedge the interest rate risk arising from their liabilities. Analyzing unique data on Dutch pension funds, we show that this hedging behavior exposes pension funds to liquidity risk due to margin calls, which can be as large as 15% of their total assets. Our analysis uncovers three key findings: (i) pension funds with tighter regulatory constraints use swaps more aggressively; (ii) in response to rising interest rates, triggering margin calls, pension funds predominantly sell safe and short-term government bonds; (iii) we demonstrate that this procyclical selling adversely affects the prices of these bonds.
    Keywords: Pension funds, fixed income, interest rate swaps, liability hedging, liquidity risk, margin calls, price impact
    JEL: E43 G12 G18
    Date: 2024–02
  7. By: Bada Han; Rashad Ahmed; Joshua Aizenman; Yothin Jinjarak
    Abstract: We explore the role of sectoral debt dynamics in shaping business cycles in a sample of 52 Emerging Market Economies (EMEs) and Frontier Market Economies (FMEs) from 2005 to 2021. Higher household debt levels and growth are associated with significantly slower GDP growth in more developed EMEs but not in less developed EMEs and FMEs. We also examine the relationship between US dollar cycles, sectoral debt levels and growth, and economic activity. Among developed EMEs, higher expected household debt growth magnifies the impact of US dollar fluctuations on economic activity, with significant but less persistent effects on consumption and more persistent effects on investment. Our empirical findings highlight the important role of household debt dynamics in relatively developed EMEs.
    JEL: F34 F41 F44 F62 G51
    Date: 2024–02
  8. By: Kjell G. Nyborg (University of Zurich - Department of Banking and Finance; Centre for Economic Policy Research (CEPR); Swiss Finance Institute); Jiri Woschitz (BI Norwegian Business School)
    Abstract: Central bank money provides utility by serving as means of exchange for virtually all transactions in the economy. Central banks issue reserves (money) to banks in exchange for assets such as government bonds. If additional reserves have value to a bank, an asset’s degree of convertibility into reserves can affect its price. We show the existence of a government bond reserves convertibility premium, which tapers off at longer maturities. The degree of convertibility is priced, but heterogeneously so. Our findings have implications for our understanding of reserves, liquidity premia, the term structure of interest rates, and central bank collateral policy.
    Keywords: central bank, reserves, convertibility premium, liquidity premium, term structure, yield curve, collateral policy, haircut
    JEL: G12 E43 E58
    Date: 2024–02
  9. By: Radoslav Raykov
    Abstract: Do banks realize simultaneous trading losses because they invest in the same assets, or because different assets are subject to the same macro shocks? This paper decomposes the comovements of bank trading losses into two orthogonal channels: portfolio overlap and common shocks. While portfolio overlap generates strong comovements, I find that the sensitivity to common shocks from non-overlapping assets is larger. This sensitivity operates through two sub-channels: the short-long interest rate correlation and the stock-bond correlation, driven by macroeconomic factors. This reveals a new trade-off whereby reductions in portfolio overlap can increase the comovement of trading losses by adding exposures to macro shocks.
    Keywords: Financial institutions; Financial stability
    JEL: G10 G11 G20
    Date: 2024–03
  10. By: Mr. Suman S Basu; Ms. Gita Gopinath
    Abstract: The Mundell-Fleming IS-LM approach has guided generations of economists over the past 60 years. But countries have experienced new problems, the international finance literature has advanced, and the composition of the global economy has changed, so the scene is set for an updated approach. We propose an Integrated Policy Framework (IPF) diagram to analyze the use of multiple policy tools as a function of shocks and country characteristics. The underlying model features dominant currency pricing, shallow foreign exchange (FX) markets, and occasionally-binding external and domestic borrowing constraints. Our diagram includes the use of monetary policy, FX intervention, capital controls, and domestic macroprudential measures. It has four panels to explore four key trade-offs related to import consumption, home goods consumption, the housing market, and monetary policy. Our extended diagram adds fiscal policy into the mix.
    Keywords: integrated policy framework; monetary policy; foreign exchange intervention; capital controls; macroprudential policy; fiscal policy
    Date: 2024–02–23
  11. By: Fungáčová, Zuzana; Kerola, Eeva; Weill, Laurent
    Abstract: We investigate whether European banks adjust their loan prices and volumes of new lending in the months running up to major national elections. Using a unique dataset that draws on data covering some 250 banksin 19 Eurozone countries from 2010 to 2020 at monthly frequency, and that includes lending amounts and interest rates on new lending, we find that European banks increase loan rates for corporate and housing loans ahead of elections. This supports the view that loan pricing changes of European banks are driven by the electoral uncertainty inherent to the democratic election process. We find that the impact of elections is more pronounced for small banks, as well as obtain some evidence that elections affect the credit supply of banks. Our findings suggest that the occurrence of elections is affecting the behavior of European banks.
    Keywords: bank, lending, politics, elections, political uncertainty, loan pricing
    JEL: C51 E37 E44 F34
    Date: 2024

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