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on International Finance |
| By: | Sander, Harald (RS: GSBE MSM, RS: GSBE other - not theme-related research, MSM Global Education - Academics); Kleimeier, Stefanie (RS: GSBE MORSE, Finance) |
| Abstract: | Cross-border finance matters for cross-border trade and, hence, the global financial conditions driven by a global financial cycle, in which the U.S. dollar’s nominal effective exchange rate plays a key role. Utilizing empirical gravity models for both trade and finance, we explore the relevance of cross-border loans for bilateral trade. We also detail how a global dollar cycle affects exports both directly and indirectly via a finance-trade channel. In line with the macroeconomic literature, we confirm that also on a bilateral level these effects are particularly strong if one trading partner is an emerging market or developing economy. By developing a finance-augmented trade gravity model, we are also shedding new light on the workings of classical gravity variables, such as physical distance and common borders, but also currency unions and regional trade agreements on the gravity of trade. |
| JEL: | F10 F30 G15 G21 |
| Date: | 2024–09–10 |
| URL: | https://d.repec.org/n?u=RePEc:unm:umagsb:2024012 |
| By: | Laser, Falk Hendrik; Mihailov, Alexander; Weidner, Jan |
| Abstract: | This policy brief presents a new comprehensive dataset on the currency compositions of international reserves of 64 economies from 1996 to 2023. The dataset contains country-specific shares in international reserves for the eight major international currencies, i.e. the United States Dollar (USD), the Euro (EUR), the Japanese Yen (JPY), the British Pound (GBP), the Canadian Dollar (CAD), the Australian Dollar (AUD), the Chinese Yuan or Renminbi (CNY), and the Swiss Franc (CHF). The dataset provides an up-to-date and comprehensive account of publicly available data on the denomination of international reserves, including data on international currencies other than the USD, EUR, JPY, and GBP. While the USD and the EUR remain the dominant global reserve currencies, the data indicate their significance has diminished as countries diversify their reserves. Currencies, including the CNY, have gained prominence, hinting at a gradual fragmentation of the international monetary system. While the USD should retain its leading role in the medium term, ongoing geoeconomic shifts suggest a move towards a multipolar reserve currency landscape. The eventual look of this landscape will depend on the credibility of reserve currency candidates and their ability to retain the characteristics that make them desirable as reserve currencies in the face of future economic and political developments. |
| Keywords: | International reserves, currency composition, central banks, monetary system |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bofitb:302554 |
| By: | Fourné, Marius; Li, Xiang |
| Abstract: | This study employs bilateral data on external assets to examine the impact of climate policies on the reallocation of international capital. We find that the stringency of climate policy in the destination country is significantly and positively associated with an increase in the allocation of portfolio equity and banking investment to that country. However, it does not show significant effects on the allocation of foreign direct investment and portfolio debt. Our findings are not driven by valuation effects, and we present evidence that suggests diversification, suasion, and uncertainty mitigation as possible underlying mechanisms. |
| Keywords: | capital flows, climate change policy, green investment, international asset allocation |
| JEL: | F21 F36 F64 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:iwhdps:302560 |
| By: | Mauro Sayar Ferreira (Cedeplar/UFMG); Joice Marques Figueiredo (Siglasul Consultoria) |
| Abstract: | Global and sovereign risk shocks significantly influence the business cycle in emerging markets. We examine their impact on the nominal and real term structure of interest rates (TIR) and the respective inflation risk premium (irp)) using a SVAR model for Brazil that also includes key macroeconomic variables. An adverse global uncertainty shock steepens both nominal and real TIR by reducing short-term yields, while irp shows less responsiveness. A positive shock to the US 3-year rate (us3yr) elevates nominal and real TIR but flattens their slopes due to a lesser increase at longer maturities; meanwhile, irp rises and becomes steeper. An adverse sovereign risk shock similarly pushes nominal and real TIR, and irp, upward, increasing their slopes. The sign of the covariance of irp with economic activity and inflation is shock-dependent, as is the relationship between the covariance of these variables and irp. Global uncertainty shocks explain approximately 22% of the forecast error variance (FEV) for 1-year real rate, being less impactful for longer maturities, nominal rates, and irp. Shocks to us3yr account for at least 25% of the FEV for nominal and real rates, and irp. Sovereign risk shocks also contribute substantially for FEV of nominal and real yields, and irp. |
| Keywords: | Term structure of interest rate, inflation risk premium, sovereign risk, uncertainty, US interest rate, SVAR. |
| JEL: | C32 E43 E44 E47 F41 G15 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:cdp:texdis:td674 |
| By: | Goldbach, Stefan; Nitsch, Volker |
| Abstract: | This paper explores a monetary experiment, the adoption of Bitcoin as legal tender in El Salvador in 2021, to analyze the impact of digital currencies on international capital flows. Using a difference-in-differences approach, we find that, instead of making transfers easier, El Salvador's official cross-border financial activity has decreased after the monetary change. This finding may reflect an increase in uncertainty. However, it is also in line with findings that link digital assets to illegal activity as previously officially recorded financial transfers may have been replaced by unrecorded activities. |
| Keywords: | crypto-assets, digital currency, legal tender, bitcoin |
| JEL: | E42 E58 F21 F32 F38 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:darddp:302552 |
| By: | Zhao, X.; Hong, S. Y.; Linton, O. B. |
| Abstract: | We study the different origins of two closely related extreme financial risk factors: volatility bursts and price jumps. We propose a new method to separate these quantities from ultra-high-frequency data via a novel endogenous thresholding approach in the presence of market microstructure noise and staleness. Our daily jump statistic proxies volatility bursts when intraday jumps are accurately controlled by our local jump test (which proves to be highly powerful with extremely low misclassification rates due to its timely detections). We find that news is more related to volatility bursts; while high-frequency trading variables, especially volume and bid/ask spread, are prominent signals for price jumps. |
| Keywords: | Price Jumps, Volatility Bursts, Market Microstructure Noise, Endogenous Sampling, High-Frequency Trading, News Sentiment |
| JEL: | G12 G14 C14 |
| Date: | 2024–09–06 |
| URL: | https://d.repec.org/n?u=RePEc:cam:camjip:2423 |
| By: | Marina Dolfin; George Kapetanios; Leone Leonida; Jose De Leon Miranda |
| Abstract: | We propose an algorithm to capture emergent patterns in the cross-correlations of financial markets, highlighting regime changes on a global scale. In our approach, financial markets are viewed as complex adaptive systems, and multiscale properties and cross-correlations are considered, particularly during stress conditions such as the COVID-19 pandemic, the invasion of Ukraine by Russia in 2022, and Brexit. We investigate whether significant disruptions reflect an imbalance in investment horizons among investors, and we propose a measure based on this imbalance to depict the impact on global financial markets. The detrended cross-correlation cost (DCCC), which is derived from detrended cross-correlation analysis, uses cross-correlations at different timescales to capture variations in investment horizons amid financial uncertainties. Our algorithm, which combines DCCC analysis and the minimum-spanning-tree filtering approach, tracks system interconnectedness and investor imbalances. We tested the DCCC indicator using daily price series of G7, Russian, and Chinese markets over the past decade and found that it increases sharply during ``crash'' periods compared to ``business as usual'' periods. Our empirical results confirm that short-term investment horizons dominate during financial instabilities; this validates our hypothesis and indicates that the DCCC can serve as a leading indicator of shifts in financial-market regimes. |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2408.17200 |
| By: | Fabio Alessandrini (University of Lausanne; Banque Cantonale Vaudoise); Eric Jondeau (University of Lausanne - Faculty of Business and Economics (HEC Lausanne); Swiss Finance Institute); Lou-Salomé Vallée (University of Lausanne and Center for Risk Management Lausanne) |
| Abstract: | This paper presents a comprehensive comparative analysis of various portfolio construction techniques in the context of decarbonization and the pursuit of net-zero objectives aligned with the 2015 Paris Agreement. Specifically, we examine different strategies that qualify as Article 9 funds under EU regulations, focusing on carbon emissions reduction objectives, such as screening and tracking error minimization techniques. Our findings indicate that all approaches would have achieved the targeted emissions reductions over the 10-year period (2012-2021) analyzed. However, the method of decarbonization significantly affects ex-post tracking errors, with the more ambitious Paris-Aligned Benchmark requiring a substantial departure from the business-as-usual benchmark. Additionally, the tracking error minimization approach involves considerable reallocation of individual securities, potentially leading to, possibly undesirable, idiosyncratic exposures. |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:chf:rpseri:rp2444 |
| By: | Sánchez Serrano, Antonio; Andersen, Isabel |
| Abstract: | We present a methodology based on quarterly sectoral accounts to build a map of the euro area financial system. The map can be used to visualise existing cross-sectoral interconnections and exposures, to analyse how the main bilateral positions have evolved over time, and to understand how past episodes of financial stress affected balance sheet structures and inter-sectoral flows. We find that the euro area financial system was essentially bank-centric when it entered the global financial crisis, and only afterwards has the importance of investment funds, government debt and central banks increased substantially. In particular, investment funds are used by euro area economic agents to gain exposure to the rest of the world and vice versa. We also document weak dynamics since the global financial crisis in lending between euro area banks and non-financial corporations. Next, we look at the financial system during the global financial crisis and the outbreak of the COVID-19 pandemic, a further four episodes of financial stress (sovereign debt crisis, the US taper tantrum, the Brexit referendum, the start of Russia’s invasion of Ukraine) and the monetary policy tightening between 2005 and 2007. While there are differences across them, we unveil interesting common features. The map can be useful in determining which sectors are resilient enough to absorb losses and whether they can serve as transmitters of stress. Finally, turning to liquidity, bank deposits, money market fund shares and securities financing transactions are key to ensure a smooth supply of liquidity and should continuously be on the radar of policymakers. JEL Classification: G01, G20, G10 |
| Keywords: | financial crisis, financial intermediation, flow of funds, Interconnections, liquidity |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:srk:srkops:202426 |
| By: | Yuqi Chen; Yifan Li; Kyrie Zhixuan Zhou; Xiaokang Fu; Lingbo Liu; Shuming Bao; Daniel Sui; Luyao Zhang |
| Abstract: | In the digital era, blockchain technology, cryptocurrencies, and non-fungible tokens (NFTs) have transformed financial and decentralized systems. However, existing research often neglects the spatiotemporal variations in public sentiment toward these technologies, limiting macro-level insights into their global impact. This study leverages Twitter data to explore public attention and sentiment across 150 countries, analyzing over 150 million geotagged tweets from 2012 to 2022. Sentiment scores were derived using a BERT-based multilingual sentiment model trained on 7.4 billion tweets. The analysis integrates global cryptocurrency regulations and economic indicators from the World Development Indicators database. Results reveal significant global sentiment variations influenced by economic factors, with more developed nations engaging more in discussions, while less developed countries show higher sentiment levels. Geographically weighted regression indicates that GDP-tweet engagement correlation intensifies following Bitcoin price surges. Topic modeling shows that countries within similar economic clusters share discussion trends, while different clusters focus on distinct topics. This study highlights global disparities in sentiment toward decentralized finance, shaped by economic and regional factors, with implications for poverty alleviation, cryptocurrency crime, and sustainable development. The dataset and code are publicly available on GitHub. |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2409.00843 |
| By: | Celso Brunetti; Matthew Carl; Jacob Gerszten; Chiara Scotti; Chaehee Shin |
| Abstract: | Does interconnectedness improve market quality? Yes.We develop an alternative network structure, the assets network: assets are connected if they are held by the same investors. We use several large datasets to build the assets network for the corporate bond market. Through careful identification strategies based on the COVID-19 shock and “fallen angels, ” we find that interconnectedness improves market quality especially during stress periods. Our findings contribute to the debate on the role of interconnectedness in financial markets and show that highly interconnected corporate bonds allow for risk sharing and require a lower compensation for risk. |
| Keywords: | Financial stability; Interconnectedness; Institutional investors; Big data |
| JEL: | C13 C55 C58 G10 |
| Date: | 2024–08–16 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfe:2024-66 |