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on International Finance |
| By: | Corsetti, G.; Lipińska, A.; Lombardo, G. |
| Abstract: | We study how risk sharing affects the macroeconomic allocation, asset prices and welfare. Employing perturbation and global methods, we characterize a global (multi-country) equilibrium in terms of asymmetries in higher-order moments of non-Gaussian shocks and country size. Financial integration has consumption smoothing and wealth level effects. Wealth effects emerge through the revaluation of a country assets and terms of trade— benefiting safer and/or smaller economies. Riskier countries enjoy smoother consumption, but at the expense of lower relative wealth. Although riskier countries gain more, safety command a welfare and financial premium, with welfare differences being near-linear in relative asset prices. |
| Keywords: | Asymmetries in Risk, Tail Risk, Gains from Risk Sharing, Terms of Trade, Consumption Smoothing, Wealth Transfers |
| JEL: | F15 F41 G15 |
| Date: | 2024–08–08 |
| URL: | https://d.repec.org/n?u=RePEc:cam:camdae:2446 |
| By: | Andres Escayola, Erik; McQuade, Peter; Schroeder, Christofer; Tirpák, Marcel |
| Abstract: | Monetary policy decisions by the Federal Reserve System in the US are widely recognised to have spillover effects on the rest of the world. In this paper, we focus on the asymmetric effects of US monetary policy shocks on macro-financial outcomes in emerging market economies (EMEs). We shed light on how domestic factors shape external monetary policy spillover effects using indicators on the macro-financial vulnerabilities and monetary policy stances of EMEs. We find that a surprise tightening of monetary policy in the US leads to an immediate tightening of financial conditions which leads to a decline in activity and prices in EMEs over one year. Importantly, these effects are amplified in periods of high vulnerabilities and attenuated when EMEs follow a prudent monetary policy stance. Our findings help explain the greater resilience of many EMEs to the Fed’s post-COVID-19 tightening cycle, and highlight the benefits of the broad improvements of monetary policy frameworks in these countries. JEL Classification: F42, E58, E52, C32 |
| Keywords: | emerging markets, monetary policy, spillovers |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20242973 |
| By: | Vania Stavrakeva; Jenny Tang |
| Abstract: | In this paper, we study how the volatility of both realized and expected macroeconomic variables relates to the variation in exchange rate volatility through the prism of the Great Moderation hypothesis. We find significant heterogeneity in exchange rate trend volatility across currency pairs despite decreases in the volatility of expected future interest rate differentials and of realized yields themselves. We argue that time variation in the relationship between macroeconomic variables and exchange rates has prevented the Great Moderation in realized yield volatility from translating to a decrease in exchange rate volatility. Considering a Campbell‐Shiller‐type decomposition of exchange rate changes into forward‐looking components linked to inflation, policy rate, and currency risk premia expectations, we find that the Great Moderation in volatility of expected yield differentials cannot explain the patterns in exchange rate volatility we observe. The main drivers of these patterns were trends in the volatility of the currency risk premium component and in the covariance between the components capturing the strength of the Fama puzzle and the expected responsiveness of monetary policy to inflation. |
| Keywords: | exchange rates; international finance; volatility trends; risk premia; Fama puzzle |
| JEL: | E44 F31 G15 |
| Date: | 2024–02–01 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedbwp:98625 |
| By: | Joseph Kogan; Romina Kazandjian; Shijia Luo; Moustapha Mbohou; Hui Miao |
| Abstract: | Using a database of emerging market fundamentals and bond index spreads across 56 frontier and emerging market countries rated below investment grade during the period 2002-22, we assess whether IMF arrangements can restore access to international capital markets (ICM) for countries in distress through liquidity and conditionality channels. We find that global financial conditions and debt/GDP are the most important determinants of access to ICM within the horizon of a typical IMF arrangement. Using an event study methodology, we show that spreads increase prior to the start of an IMF arrangement and then decrease gradually. By exploiting different characteristics of IMF arrangements, we find evidence that the reforms implemented under the IMF arrangement, as measured by rounds of successful IMF reviews, matter more in the medium term than the IMF’s role as a liquidity provider. These results are consistent with our analysis of 55 credit rating upgrades to ICM access levels, which suggests that debt reduction plays the largest role and that IMF arrangements lend credibility to reforms. |
| Keywords: | International capital markets; market access; IMF; debt crisis; debt rescheduling; default; sovereign debt; sovereign debt restructuring; sovereign bonds; Eurobonds |
| Date: | 2024–08–09 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2024/173 |
| By: | Hoffmann, Clemens; Kastens, Lina; vPortugal-Perez, Alberto; von Cramon-Taubadel, Stephan |
| Abstract: | We look for evidence that countries increasingly insulate their domestic markets for staple grains from global markets when international prices increase. Previous studies have demonstrated that the transmission of international to domestic prices for these products is less than perfect, which reduces the ability of the global trading system to buffer shocks. However, past studies generally assume that relationships between international and domestic prices are constant, and hence that a country’s degree of insulation does not vary over time. To relax this assumption, we use a smooth-transition model, a modified version of the error correction model (ECM). We estimate elasticities of transmission from international to domestic wholesale and retail prices for a comprehensive set of countries for wheat, yellow and white maize, and rice. We find that price transmission from international to domestic prices weakens in many countries and on average when international prices peak, in other words that the insulation of domestic from international prices increases during high-price episodes (such as in 2007/08 and 2022). We also find that this increased insulation cannot be attributed exclusively to changes in border measures such as export restrictions or import tariffs. This suggests that countries are also using measures such as price controls or the release of stocks to insulate their domestic markets for staple grains. |
| Keywords: | Demand and Price Analysis, International Relations/Trade |
| Date: | 2024–08–07 |
| URL: | https://d.repec.org/n?u=RePEc:ags:cfcp15:344313 |
| By: | Alexander Abramov (RANEPA); Alexander Radygin (Gaidar Institute for Economic Policy); Maria Chernova (RANEPA) |
| Abstract: | In contrast to 2022, a rare phenomenon of negative returns on almost most categories of financial assets happened due to a sharp increase in interest rates by central banks of developed countries, the year 2023 was a relatively favorable year of recovery growth in returns on these assets. The economies of the United States and the European Union avoided recession, and the decline in inflation offered financial markets hope for lower interest rates in 2024. To assess the investment attractiveness of different financial instruments in 2023, it is essential to analyze data on returns and risks of 147 investment strategies popular in the world, represented by stock indices and large investment funds over different time horizons in 2014–2023. |
| Keywords: | Russian economy, stock market, bond market, corporate bond market, derivatives market, private investors |
| JEL: | G01 G12 G18 G21 G24 G28 G32 G33 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:gai:ppaper:ppaper-2024-1324 |
| By: | Li, Xi; Lou, Yun |
| Abstract: | We study the role of foreign institutional investors in cross-border lending. We find that a borrower’s foreign institutional ownership is positively associated with the likelihood of foreign banks leading a loan syndicate. This relation is stronger among borrowers with more opaque information environment and when foreign institutional shareholders have better access to soft information. We also find that foreign banks are more likely to extend loans to borrowers with foreign institutional shareholders that are headquartered in the same country or members of the same loan associations. These results are consistent with foreign institutional shareholders facilitating cross-border lending by reducing monitoring costs and information frictions faced by foreign lenders. |
| Keywords: | syndicated loans; foreign institutional ownership; cross-border lending; information; monitoring |
| JEL: | G23 G32 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:124422 |
| By: | Oleksiy Kryvtsov; Gary Koop |
| Abstract: | We study how within-store price variation changes with inflation, and whether households exploit it to attenuate the inflation burden. We use micro price data for food products sold by 91 large multi-channel retailers in 10 countries between 2018 and 2024. Measuring unit prices within narrowly defined product categories, we analyze two key sources of variation in prices within a store: temporary price discounts and differences across similar products. Price changes associated with discounts grew at a much lower average rate than regular prices, helping to mitigate the inflation burden. By contrast, cheapflation—a faster rise in prices of cheaper goods relative to prices of more expensive varieties of the same good—exacerbated it. Using Canadian Homescan Panel data, we estimate that spending on discounts reduced the change in the average unit price by 4.1 percentage points, but expenditure switching to cheaper brands raised it by 2.8 percentage points. |
| Keywords: | Inflation and prices; Inflation: costs and benefits; Market structure and pricing |
| JEL: | E21 E30 E31 L81 |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocawp:24-31 |
| By: | Ben Knox; Yannick Timmer |
| Abstract: | We study investors’ perceptions of inflation through the lens of a high-frequency event study and document that they have a stagflationary view of the world. In response to higher-than-expected inflation, investors expect firms’ nominal cash flows to remain stagnant while discount rates increase, resulting in lower stock prices. Both the equity risk premium and nominal risk-free yields rise. However, longer-term real yields remain unchanged, and policy-sensitive real yields even decline, with increases in nominal yields offset by larger increases in inflation expectations. Consistent with a stagflationary view in which investors interpret inflation as a marginal cost shock, investors expect firms with low market power to suffer larger declines in cash flows. Cash flow expectations of equity investors are aligned with those of professional earnings analysts, both in the time series and across the market power distribution. |
| Keywords: | inflation, stock returns, stagnant cash flows, market power |
| JEL: | G12 E31 E44 L11 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11236 |
| By: | Yannick Becker; Pascal Halffmann; Anita Sch\"obel |
| Abstract: | In portfolio optimization, decision makers face difficulties from uncertainties inherent in real-world scenarios. These uncertainties significantly influence portfolio outcomes in both classical and multi-objective Markowitz models. To address these challenges, our research explores the power of robust multi-objective optimization. Since portfolio managers frequently measure their solutions against benchmarks, we enhance the multi-objective min-regret robustness concept by incorporating these benchmark comparisons. This approach bridges the gap between theoretical models and real-world investment scenarios, offering portfolio managers more reliable and adaptable strategies for navigating market uncertainties. Our framework provides a more nuanced and practical approach to portfolio optimization under real-world conditions. |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2407.19936 |
| By: | Yoontae Hwang; Stefan Zohren; Yongjae Lee |
| Abstract: | In the era of rapid globalization and digitalization, accurate identification of similar stocks has become increasingly challenging due to the non-stationary nature of financial markets and the ambiguity in conventional regional and sector classifications. To address these challenges, we examine SimStock, a novel temporal self-supervised learning framework that combines techniques from self-supervised learning (SSL) and temporal domain generalization to learn robust and informative representations of financial time series data. The primary focus of our study is to understand the similarities between stocks from a broader perspective, considering the complex dynamics of the global financial landscape. We conduct extensive experiments on four real-world datasets with thousands of stocks and demonstrate the effectiveness of SimStock in finding similar stocks, outperforming existing methods. The practical utility of SimStock is showcased through its application to various investment strategies, such as pairs trading, index tracking, and portfolio optimization, where it leads to superior performance compared to conventional methods. Our findings empirically examine the potential of data-driven approach to enhance investment decision-making and risk management practices by leveraging the power of temporal self-supervised learning in the face of the ever-changing global financial landscape. |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2407.13751 |
| By: | Flavio Abanto Salcedo (Central Reserve Bank of Peru (BCRP)) |
| Abstract: | This paper presents an empirical analysis of the effectiveness of foreign exchange (FX) intervention in Peru, with emphasis on the intervention carried out through derivative instruments. I use two different but related approaches to estimate the impact of these kind of interventions between 2014 and 2023. First, I estimate a proxy SVAR with daily data which uses an instrument constructed with intraday data. Results show that FX interventions have an impact on the level of the exchange rate in the expected direction: an FX sale intervention of between USD 60 and USD 120 million generates an appreciation of between 0.02 and 0.04 percent of the currency in the same day. On the other hand, spot intervention is found to be slightly more effective. The estimations, however, do not provide sufficient evidence to conclude on the impact on the exchange rate volatility in the short run. Second, I estimate event study regressions with intraday data, which allowed to confirm that these interventions have the expected effect after around 10 minutes. However, no evidence of the existence of an information channel is found since the announcement of these interventions does not significantly impact the exchange rate. |
| Keywords: | foreign exchange intervention; currency; derivatives; derivate instruments; Peru; exchange rate |
| JEL: | F31 G11 G14 G15 |
| Date: | 2024–08–20 |
| URL: | https://d.repec.org/n?u=RePEc:gii:giihei:heidwp17-2024 |
| By: | Gara Afonso; Kevin Clark; Brian Gowen; Gabriele La Spada; JC Martinez; Jason Miu; Will Riordan |
| Abstract: | The Federal Reserve (Fed) implements monetary policy in a regime of ample reserves, where short-term interest rates are controlled mainly through the setting of administered rates, and active management of the reserve supply is not required. In yesterday’s post, we proposed a methodology to evaluate the ampleness of reserves in real time based on the slope of the reserve demand curve—the elasticity of the federal (fed) funds rate to reserve shocks. In this post, we propose a suite of complementary indicators of reserve ampleness that, jointly with our elasticity measure, can help policymakers ensure that reserves remain ample as the Fed shrinks its balance sheet. |
| Keywords: | reserves; ample reserves; overnight reverse repo (ON RRP); monetary policy implementation; Federal Reserve |
| JEL: | E42 E52 G21 |
| Date: | 2024–08–14 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednls:98685 |