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on International Finance |
| By: | Conrado Brum Civelli (Banco Central del Uruguay; Universidad Complutense de Madrid; Universidad de la República Oriental del Uruguay); Alejandro Fried Gindel (Banco Central del Uruguay); Alfredo Garcia-Hiernaux (Universidad Complutense de Madrid) |
| Abstract: | The Russian invasion of Ukraine in early 2022, triggered a wave of risk aversion in the global financial markets. However, in contrast to previous events, South American emerging economies experienced limited impact to this more restrictive global financial environment. To assess the financial conditions of these economies over time, particularly Brazil, Chile and Uruguay, we propose an International Financial Conditions Index for South American economies (IFCI-SA), built from a Dynamic Factor Model. This index includes standard variables provided by the literature, along with sovereign debt risk premia and the most relevant commodity prices for these economies. We use our indicator to study the influential role played by commodity prices in the financial conditions of South American emerging economies from October 2007 to May 2022, paying particular attention to the financial implications stemming from the conflict in Ukraine. |
| Keywords: | International Financial Conditions, South American Economies, Emerging Economies, Dynamic Factor Model |
| JEL: | F30 F34 F37 G15 G17 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:bku:doctra:2023006&r=ifn |
| By: | Graziano, Marco; Habib, Maurizio Michael |
| Abstract: | This paper investigates the sensitivity of the demand for safe government debt to currency unhedged and hedged excess returns in a sample of US mutual funds. We find evidence of active rebalancing towards government bonds that offer relatively higher returns on an unhedged basis, in particular euro denominated securities. The size of the effect is large, leading to a change in portfolio share by around one percentage point on average in response to a change by one percentage point in the currency-specific excess return. Interestingly, mutual funds rebalance their portfolio towards currencies, such as the Japanese yen, that display large deviations in the covered interest parity and offer higher returns than US Treasuries on an hedged basis. Finally, when global financial risk is on the rise, US mutual fund managers repatriate their investments towards US government debt securities, mainly at the expenses of euro-denominated ones. Our results imply that deviations in pricing conditions like uncovered and covered interest parity for sovereign bonds affect capital flows from the United States towards other major currency areas. JEL Classification: F3, G11, G12, G15, G23 |
| Keywords: | covered interest parity, government bonds, mutual funds, safe assets, search for yield |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20242931&r=ifn |
| By: | Leslie Sheng Shen; Tony Zhang |
| Abstract: | We develop a structural model of the global banking network and analyze its role in facilitating risk sharing and amplifying shocks across countries and over time. Using bilateral international lending data, we uncover significant heterogeneity in the willingness and capacity of banks to provide cross‐border interbank and corporate loans. This heterogeneity explains variation in risk sharing and amplification across countries. Moreover, we show that cross‐border loan supply has become less elastic overtime, resulting in a decline in risk sharing. While shock amplification has also declined on average, some countries may experience greater amplification in response to foreign funding shocks. |
| Keywords: | global economy; risk sharing; shock propagation; capital flows |
| JEL: | F34 G21 |
| Date: | 2024–04–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedbwp:98178&r=ifn |
| By: | Angelo Ranaldo (University of St. Gallen; Swiss Finance Institute); Ganesh Viswanath-Natraj (Warwick Business School); Junxuan Wang (University of Cambridge - Centre for Endowment Asset Management, Cambridge Judge Business School) |
| Abstract: | We conduct the first comprehensive study of blockchain currencies, stablecoins pegged to traditional currencies and traded on decentralized exchanges. Our findings reveal that the blockchain market generally operates efficiently, with blockchain prices and trading volumes closely aligned with those of their traditional counterparts. However, blockchain-specific factors, such as gas fees and Ethereum volatility, act as frictions. Blockchain prices are determined by macroeconomic fundamentals and order flow. We use a rich transaction-level database of trades and link it to the characteristics of market participants. Traders with significant market share and access to the primary market have a greater impact on pricing, likely due to informational advantages. |
| Keywords: | Stablecoins, foreign exchange, blockchain, price efficiency, market resilience, microstructure |
| JEL: | D53 E44 F31 G18 G20 G28 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp2429&r=ifn |
| By: | Matías Moretti (University of Rochester); Lorenzo Pandolfi (Università di Napoli Federico II and CSEF); Sergio L. Schmukler (World Bank); Germán Villegas Bauer (International Monetary Fund); Tomás Williams (George Washington University) |
| Abstract: | We present evidence of inelastic demand in the market for risky sovereign bonds and examine its interplay with government policies. Our methodology combines bond-level evidence with a structural model featuring endogenous bond issuances and default risk. Empirically, we exploit monthly changes in the composition of a major bond index to identify flow shocks that shift the available bond supply and are unrelated to country fundamentals. We find that a 1 percentage point reduction in the available supply increases bond prices by 33 basis points. Although exogenous, these shocks might influence government policies and expected bond payoffs. We identify a structural demand elasticity by feeding the estimated price reactions into a sovereign debt model that allows us to isolate endogenous government responses. We find that these responses account for a third of the estimated price reactions. By penalizing additional borrowing, inelastic demand acts as a commitment device that reduces default risk. |
| Keywords: | emerging markets bond index, inelastic financial markets, institutional investors, international capital markets, small open economies, sovereign debt |
| JEL: | F34 F41 G11 G15 |
| Date: | 2024–03–26 |
| URL: | http://d.repec.org/n?u=RePEc:sef:csefwp:713&r=ifn |
| By: | Amador, João; Mehl, Arnaud; Schmitz, Martin; Garcia, Joana |
| Abstract: | We analyze, for the first time, how firms choose the currency in which they price transactions in international trade of services and investigate, using direct evidence, whether the US dollar (USD) plays a dominant role in services trade. Drawing on a new granular dataset on extra-European Union exports of Portuguese firms broken down by currency, we show that currency choices in services trade are active firm-level decisions. Firms that are larger and rely more on inputs priced in foreign currencies are less likely to use the domestic currency to export services. Importantly, we show that the USD has a dominant role as a vehicle currency in trade of services – but to a lesser extent than in trade of goods – and that this is not just due to differences in the geography of trade. An external validity test based on macro data available for Portugal and six other European countries confirms this finding. In line with predictions from recent theoretical models, our results are consistent with the lower prevalence of USD in services trade arising from a lower openness of services markets and a stronger reliance of services on domestic inputs. JEL Classification: F14, F31, F41 |
| Keywords: | dominant currency paradigm, international trade, services |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20242932&r=ifn |
| By: | Yifan He; Abootaleb Shirvani; Barret Shao; Svetlozar Rachev; Frank Fabozzi |
| Abstract: | This study introduces novel concepts in the analysis of limit order books (LOBs) with a focus on unveiling strategic insights into spread prediction and understanding the global mid-price (GMP) phenomenon. We define and analyze the total market order book bid--ask spread (TMOBBAS) and GMP, showcasing their significance in providing a deeper understanding of market dynamics beyond traditional LOB models. Employing high-frequency data, we comprehensively examine these concepts through various methodological lenses, including tail behavior analysis, dynamics of log-returns, and risk--return performance evaluation. Our findings reveal the intricate behavior of TMOBBAS and GMP under different market conditions, offering new perspectives on the liquidity, volatility, and efficiency of markets. This paper not only contributes to the academic discourse on financial markets but also presents practical implications for traders, risk managers, and policymakers seeking to navigate the complexities of modern financial systems. |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2404.11722&r=ifn |
| By: | Javier Gil-Bazo; Raffaele Santioni |
| Abstract: | Exploiting the Securities Holdings Statistics from the Eurosystem, we study the relation between shareholder country concentration and flow risk for euro area mutual funds. We find that funds with a more geographically dispersed investor base experience more volatile flows. The link between shareholder country concentration and flow risk is a widespread phenomenon: It holds for funds investing in different asset classes and in different regions. However, we find no difference in net performance between funds with more and less concentrated shareholders, which suggests that any potential costs of investors’ geographic dispersion are offset by either enhanced liquidity management or superior performance. Additional tests reveal that investors in funds with higher geographic shareholder dispersion are more sensitive to fund performance, consistently with a clientele effect driving our findings. Finally, we show that the positive association between geographic investor dispersion and flow risk holds for different measures of flow risk and is not driven by institutional investors, non-euro area investors, or the COVID-19 episode. |
| Keywords: | geographic shareholder dispersion, mutual-fund flow risk, mutual fund fragility, cross-border funds |
| JEL: | G23 G11 G17 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:bge:wpaper:1440&r=ifn |
| By: | Hartung, Benjamin |
| Abstract: | Banks in the euro area can generate high-quality liquid assets (HQLA) by borrowing central bank reserves from the Eurosystem against non-HQLA collateral. This paper quantifies the extent of this liquidity transformation and finds that on average EUR 0.92 of net HQLA are generated for each euro of credit provided by the Eurosystem. The paper then identifies intentional liquidity transformation using two novel approaches: The first approach compares the liquidity profile of already pledged vs new collateral, and the second approach compares the liquidity profile of the pool of pledged securities with banks' total eligible securities holdings. Both approaches show that banks use their least liquid assets as collateral first and pledge more liquid assets only at the margin. This intentional liquidity transformation is sizable and accounts for 30-60% of generated HQLA. These results are relevant for calibrating the collateral framework as well as the optimal size and composition of the Eurosystem balance sheet. JEL Classification: C23, E52, E58, G28 |
| Keywords: | central bank operational framework, collateral framework, liquidity coverage ratio, liquidity transformation, reserve demand |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20242933&r=ifn |
| By: | Liyan Han; Lei Li; Huiyi Liao; Libo Yin |
| Abstract: | We study the asset pricing implications of firms’ participation in the global supply chain. A firm’s global sourcing strategy serves as an option to hedge its value against trade shocks. Higher output tariffs increase firm value through reduced import competition, whereas higher input tariffs decrease firm value through higher input costs. The negative effects of input tariffs are more substantial for firms more reliant on foreign suppliers. We test the theoretical predictions in the context of the US-China trade war and quantify the impact of trade protectionism on Chinese firm value. One standard deviation increase of input tariff reduces the daily stock return by 0.12 percent for firms importing inputs, more than offsetting the gains from raising output tariffs by one standard deviation. The negative effect of input tariffs is larger for firms with high import intensity and low import substitutability. The welfare loss of the Chinese retaliatory tariffs was as much as $5.50 billion, 0.81% of the total value added of Chinese listed firms. |
| Keywords: | Trade War, Global Supply Chain, Firm Value |
| JEL: | F13 F14 G12 G14 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2024_531&r=ifn |