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on International Finance |
| By: | Mahmood, Asif; Ali, Ringchan |
| Abstract: | Emerging literature after the global financial crisis of 2007-08 have highlighted the important role of financial conditions as they provide a comprehensive snapshot of the overall economic health and stability. Following this, many academic researchers, central banks and international organizations developed several composite indices, commonly known as Financial Condition Index (indices) or FCIs. In this this study, we attempt to construct the monthly financial conditions index for Pakistan using high-frequency indicators from domestic and external markets. Our results show that much of the post GFC period in Pakistan’s financial system was characterized by accommodative financial conditions, with three but higher intensity phases of tighter financial conditions. Based on the constructed FCI, we also observed that current ongoing episode of tightening is on average longer than previous two phases. In terms of drivers, our estimations reveal the increasing role of interest rates in determining the financial conditions in Pakistan during the sample period. Moreover, the preliminary analysis does indicate some underlying qualities in our constructed FCI to forecast near-term growth with reasonable precision. |
| Keywords: | Financial Conditions Index, Principal Component Analysis, Forecasting |
| JEL: | C43 C53 E44 E52 |
| Date: | 2024–09–06 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:121952 |
| By: | Taiyo Yoshimi; Uraku Yoshimoto; Takatoshi Ito; Kiyotaka Sato; Junko Shimizu; Yushi Yoshida |
| Abstract: | This study utilizes the granular Japanese customs data from 2014 to 2020 to examine the exchange rate pass-through (ERPT) to Japanese import prices. It mainly focuses on the impact of the invoicing currency choice on ERPT. The ERPT elasticity in products invoiced in the exporter’s currency is greater than those invoiced in yen. In the full sample analysis, the ERPT elasticity was 0.75 for products invoiced in the exporter’s currency, compared to about 0.19 for yen-invoiced products. We find the same tendency for imports from two Asian powerhouses: China and Thailand. There is no significant difference in the ERPT elasticity between products invoiced in the exporter’s currency and those invoiced in a third currency (i.e., a currency other than yen or the exporter’s currency). In addition, an asymmetric pass-through is found, namely the ERPT during the appreciation phase of the yen is higher than during the depreciation phase. This finding is interpreted that foreign exporters strengthen their pricing-to-market behavior during the yen depreciation phase to maintain their market share. |
| JEL: | F1 F31 F33 F39 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32910 |
| 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:camdae:2449 |
| By: | Joshua Aizenman; Jamel Saadaoui |
| Abstract: | We investigate the resilience of CESEE countries during ECB monetary cycles after the entrance of ten countries to the EU in 2004. Undeniably, these countries have experienced a ‘miracle’ growth during the 2000s decade. However, several obstacles appeared following the global financial crisis and the euro crisis. In many CESEE countries, the quality of institutions has stalled, or even worse, has known a deterioration. Our investigation examines how fundamental and institutional variables influence cross-country resilience regarding exchange rates, interest rates, stock prices, inflation, and growth during the subsequent monetary cycles. Specifically, we focus on five ECB tightening and easing cycles observed during 2005-2023. Cross-sectional regressions reveal that limiting inflation, active management of precautionary buffers of international reserves, current account surpluses, better financial development, and institution quality are important predictors of resilience in the next cycle. The panel regressions show that the US shadow rate strongly influences resilience during the ECB monetary cycles. Besides, various asymmetries are discovered for current account balances, international reserves, and fuel import shares during tightening cycles. Panel quantile regressions detect asymmetries along the distribution of the dependent variables for financial development, central bank independence, and the inflation rate preceding the cycles. These findings may provide guidelines that are useful for returning to the trajectory observed before the euro crisis by identifying the main fundamental and institutional variables that enhance the resilience of CESEE. |
| JEL: | E50 F32 F36 F42 F65 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32957 |
| By: | I. Abid; R. Benkraiem (Audencia Business School); H. Mzoughi; C. Urom |
| Abstract: | Considering various critical periods including the COVID-19 pandemic and the ongoing Russian-Ukraine war, this paper investigates the dynamics of extreme spillover effects from the crude oil market to the financial markets of major oil-exporting countries. With the increased integration of global financial systems, oil market fluctuations can have far-reaching implications for economies that are heavily reliant on oil exports. We employ a wavelet approach to explore the co-movement and lead-lag relationships between the oil market and the financial markets of the considered countries. Next, we follow the newly introduced frequency-based connectedness approach of Hanif et al. (2023) to explore the dynamic connectedness and risk transmission among these markets. First, results from the wavelet coherency technique show that the degree of co-movement during the Russia-Ukraine war was significantly lower than it was under both the pre-crises and COVID-19 pandemic periods as shown by fewer regions with warmer colors (red), which show significant dependence at the 5% level, especially for Canada. Secondly, the dynamic connectedness of these markets was largely driven by long-term dynamics during the Russia-Ukraine crisis period, unlike the short-term driven connectedness observed during the COVID-19 pandemic. The average degree of connectedness at high frequencies (short-term) forms a smaller proportion of the average level of connectedness at low frequencies (long-term), indicating a stronger long-term influence of the crisis on the interconnectedness of these markets. Additionally, we find that Canada and the United States were the major net transmitters of shocks to the network during the conflict period, while Iraq exhibited the strongest level of idiosyncratic shocks. Interestingly, the crude oil market was observed to send stronger shocks to the network at the onset of the war, with the impact gradually diminishing as the conflict progressed. Our study provides valuable insights for policymakers and investors as a guide toward more informed decision-making and appropriate risk management strategies in the face of oil price volatility in these regions. |
| Abstract: | Considering various critical periods including the COVID-19 pandemic and the ongoing Russian–Ukraine war, this paper investigates the dynamics of extreme spillover effects from the crude oil market to the financial markets of major oil-exporting countries. With the increased integration of global financial systems, oil market fluctuations can have far-reaching implications for economies that are heavily reliant on oil exports. We employ a wavelet approach to explore the co-movement and lead–lag relationships between the oil market and the financial markets of the considered countries. Next, we follow the newly introduced frequency-based connectedness approach of Hanif et al. (2023) to explore the dynamic connectedness and risk transmission among these markets. First, results from the wavelet coherency technique show that the degree of co-movement during the Russia–Ukraine war was significantly lower than it was under both the pre-crises and COVID-19 pandemic periods as shown by fewer regions with warmer colors (red), which show significant dependence at the 5% level, especially for Canada. Secondly, the dynamic connectedness of these markets was largely driven by long-term dynamics during the Russia–Ukraine crisis period, unlike the short-term driven connectedness observed during the COVID-19 pandemic. The average degree of connectedness at high frequencies (short-term) forms a smaller proportion of the average level of connectedness at low frequencies (long-term), indicating a stronger long-term influence of the crisis on the interconnectedness of these markets. Additionally, we find that Canada and the United States were the major net transmitters of shocks to the network during the conflict period, while Iraq exhibited the strongest level of idiosyncratic shocks. Interestingly, the crude oil market was observed to send stronger shocks to the network at the onset of the war, with the impact gradually diminishing as the conflict progressed. Our study provides valuable insights for policymakers and investors as a guide towards more informed decision-making and appropriate risk management strategies in the face of oil price volatility in these regions. |
| Keywords: | Oil prices Equity market Oil-exporting countries Wavelet coherence Frequencyband connectedness TVP-VAR JEL classification: C32 F65 G11, Oil prices, Equity market, Oil-exporting countries, Wavelet coherence, Frequencyband connectedness, TVP-VAR JEL classification: C32, F65, G11, Extreme risk, risk spillovers, oil-exporting nations. |
| Date: | 2024–03 |
| URL: | https://d.repec.org/n?u=RePEc:hal:journl:hal-04681726 |
| By: | Cristina Jude; Grégory Levieuge |
| Abstract: | At the height of the COVID-19 crisis, many countries have reduced their countercyclical capital buffer (CCyB) and cut key policy rates. We exploit this quasi-natural experiment to gauge the combined effects of these two policies on bank lending rates (BLRs). First, we theoretically show that the joint action of CCyB release and monetary policy easing lowers BLRs by more than the sum of their individual effects. We then empirically confirm this synergy by a difference-in-difference analysis. Notably, for a one percentage point release of the CCyB, corporate BLRs decreased by around 11 basis points more compared to countries without CCyB relief. |
| Keywords: | Countercyclical Capital Buffer, Monetary Policy, Policy Complementarity, Lending Rates, Covid-19 |
| JEL: | G21 G28 E52 E44 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:bfr:banfra:961 |
| By: | Tomas Boukal (Institute of Economic Studies, Charles University, Prague, Czech Republic) |
| Abstract: | Multinational enterprises are increasingly using offshore locations to pay lower taxes on their profits. This behavior has distortive effects on the global economy, as the concentration of multinational activities mirrors global tax patterns. In this paper, I exploit the OECD country-by-country reporting statistics to analyze the determinants behind the location of profits. I find that profit allocation is sensitive to both effective tax rates and geographical proximity, confirming the significance of these factors in MNEs´ tax planning strategies. Building on the work of Dharmapala and Hines (2009), this study also uncovers that MNEs are more likely to report profits to jurisdictions with superior governance quality, integrating both Global Governance Indicators and factors linked to financial secrecy. However, the findings indicate that tax haven jurisdictions exhibit a degree of reluctance when it comes to implementing recently introduced policies aimed at combating corruption and tax abuses. |
| Keywords: | international taxation, tax havens, country-by-country reporting, gravity models, governance quality |
| JEL: | F23 G15 G28 H26 H32 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:fau:wpaper:wp2024_31 |
| By: | Onur Polat (Department of Public Finance, Bilecik Seyh Edebali University, Bilecik, Turkiye); Juncal Cunado (University of Navarra, School of Economics, Edificio Amigos, E-31080, Pamplona, Spain); Oguzhan Cepni (Ostim Technical University, Ankara, Turkiye; University of Edinburgh Business School, Centre for Business, Climate Change, and Sustainability; Department of Economics, Copenhagen Business School, Denmark); Rangan Gupta (Department of Economics, University of Pretoria, Private Bag X20, Hatfield 0028, South Africa) |
| Abstract: | This paper investigates the impact of oil supply, demand, and risk shocks on U.S. state-level stock and bond returns, utilizing daily data from February 1994 to March 2024. It examines the individual effects of oil price shocks on each state’s stock and bond returns and explores how fluctuations in oil prices influence the interdependence between state-level stock and bond markets. The findings reveal that oil demand shocks have a significant positive impact, while oil supply shocks have a significant negative impact on state-level stock returns. Although state-level bond returns also react to these supply and demand shocks, their response is statistically less significant than that of stock returns, indicating that cross-asset diversification is possible during periods of oil supply and demand shocks. However, both stock and bond returns are significantly and negatively affected by oil risk shocks, which implies limited opportunities for cross-asset diversification when oil price fluctuations are driven by risk factors. Additionally, the interdependence between U.S. equity and bond markets is more significantly influenced by oil risk shocks than by supply or demand shocks, suggesting an increase in the interconnectedness of stock and bond returns following an oil risk shock. Further analysis, using a reverse-MIDAS model to relate high-frequency connectedness measures to monthly oil price shocks, indicates that oil supply shocks positively and significantly impact stock market connectedness, while oil inventory demand shocks negatively affect bond market connectedness. Implications of our findings are discussed. |
| Keywords: | Oil price shocks, state-level stock market returns, state-level municipal bond returns, connectedness. |
| JEL: | C22 C32 G10 Q41 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:pre:wpaper:202438 |
| By: | Dunne, Peter G.; Emter, Lorenz; Fecht, Falko; Giuliana, Raffaele; Peia, Oana |
| Abstract: | We study the role of liquidity management tools (LMTs) in mitigating financial fragility in investment funds during the COVID-19 market distress. We employ a unique dataset that reports the availability of different types of LMTs in a sample of Irish-domiciled corporate bond funds. We find that funds with access to price-based tools such as redemption fees or anti-dilution levies experienced lower net outflows in March 2020, as compared to funds with only quantity-based tools such as redemption gates, temporary suspensions, or redemptions in kind. This difference is stronger among funds with a high sensitivity of flows to past performance and reflects both higher gross inflows and lower gross outflows during this episode. Funds with price-based LMTs also rebalance their portfolios towards less liquid bonds. This portfolio rebalancing results in a lower price decline of bonds held disproportionally more by funds with price-based LMTs in our sample of Irish-domiciled funds. |
| Keywords: | liquidity management tools, investment funds, COVID-19, financial fragility |
| JEL: | G2 G23 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bubdps:302557 |
| By: | Mirza, Harun; Salleo, Carmelo; Trachana, Zoe |
| Abstract: | This study assesses euro area banks’ profitability using granular stress test data from three EU-wide exercises, coordinated by the European Banking Authority, that took place in 2016, 2018, and 2021. We propose a credit portfolio-level risk-adjusted return on assets for the euro area as a whole and for individual countries to assess the profitability of lending activities among euro area banks. Using banks’ own projections under the adverse scenarios of the stress test exercises for a consistent sample of euro area banks, we aim to uncover the effect of severe macroeconomic and financial conditions on the profitability of the various portfolios. We investigate how many country portfolios switch from profitable to loss-making under adverse conditions and show that this number peaks in the 2018 stress test exercise, while the 2021 exercise yields the lowest overall profitability. Overall, around 30% of exposures become unprofitable under stress conditions across the latest two exercises (compared to 20% for the 2016 exercise), mostly concentrated in the non-financial corporations (NFC) segment and, to a lesser extent, in the financial and mortgage portfolios. We also show in a regression analysis that the yield curve is an important determinant of portfolio-level profitability in a stress test setting, while the unemployment rate seems to be relevant in determining portfolio switches and GDP growth seems to influence the change in profitability. The results also point to some portfolio heterogeneity. |
| Keywords: | Bank profitability, cost of risk, net interest income, portfolio analysis, scenario analysis, stress testing |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbops:2024356 |
| By: | Zhizhuo Kou; Holam Yu; Jingshu Peng; Lei Chen |
| Abstract: | Despite significant progress in deep learning for financial trading, existing models often face instability and high uncertainty, hindering their practical application. Leveraging advancements in Large Language Models (LLMs) and multi-agent architectures, we propose a novel framework for quantitative stock investment in portfolio management and alpha mining. Our framework addresses these issues by integrating LLMs to generate diversified alphas and employing a multi-agent approach to dynamically evaluate market conditions. This paper proposes a framework where large language models (LLMs) mine alpha factors from multimodal financial data, ensuring a comprehensive understanding of market dynamics. The first module extracts predictive signals by integrating numerical data, research papers, and visual charts. The second module uses ensemble learning to construct a diverse pool of trading agents with varying risk preferences, enhancing strategy performance through a broader market analysis. In the third module, a dynamic weight-gating mechanism selects and assigns weights to the most relevant agents based on real-time market conditions, enabling the creation of an adaptive and context-aware composite alpha formula. Extensive experiments on the Chinese stock markets demonstrate that this framework significantly outperforms state-of-the-art baselines across multiple financial metrics. The results underscore the efficacy of combining LLM-generated alphas with a multi-agent architecture to achieve superior trading performance and stability. This work highlights the potential of AI-driven approaches in enhancing quantitative investment strategies and sets a new benchmark for integrating advanced machine learning techniques in financial trading can also be applied on diverse markets. |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2409.06289 |
| By: | Forbes, Kristin; Ha, Jongrim; Kose, M. Ayhan |
| Abstract: | This paper analyzes cycles in policy interest rates in 24 advanced economies over 1970–2024, combining a new application of business cycle methodology with rich time-series decompositions of the shocks driving rate movements. “Rate cycles” have gradually evolved over time, with less frequent cyclical turning points, more moderate tightening phases, and a larger role for global shocks. Against this backdrop, the 2020–24 rate cycle has been unprecedented in many dimensions: it features the fastest pivot from active easing to a tightening phase, followed by the most globally synchronized tightening, and an unusually long period of holding rates constant. It also exhibits the largest role for global shocks—with global demand shocks still dominant, but an increased role for global supply shocks in explaining interest rate movements. Inflation and the growth in output and employment have, on average, largely returned to historical norms for this stage in a tightening phase. Any recalibration of interest rates going forward should be gradual, however, and account for the interactions between increasingly important global factors and domestic circumstances, combined with uncertainty as to whether rate cycles have reverted to pre-2008 patterns. |
| Keywords: | Monetary policy; Oil prices; demand shocks; supply shocks; ECB; Federal Reserve |
| JEL: | E31 E32 E51 Q43 |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:121791 |
| By: | Dawit Z. Assefa (Hult International Business School, London, UK); Alfonsina Iona (School of Economics and Finance, Queen Mary University of London); Leone Leonida (King’s Business School, King’s College) |
| Abstract: | This paper examines the relationship between political competition and financial development across a global sample of 127 countries, with a particular focus on developed and democratic OECD countries. Building on the theoretical frameworks of Acemoglu and Robinson (2006) and Besley et al. (2010), we explore whether political competition impacts financial development in a non-monotonic or monotonic manner. Using robust measures of financial development that capture both the depth and efficiency of the financial sector, we find a U-shaped relationship between political competition and financial development in the full sample, consistent with the political replacement effect of Acemoglu and Robinson. This result suggests that financial development is promoted when political competition is either very low or very high, but hindered at intermediate levels of competition. In contrast, we observe an S-shaped relationship in OECD countries, indicating that political competition at intermediate levels is particularly conducive to financial development in developed democracies. These findings provide new insights into the nuanced role political competition plays in shaping financial systems, challenging the assumption that more political competition always leads to greater financial development. Our results are robust to a range of estimation techniques and alternative measures of political competition and financial development. |
| Keywords: | Financial Development, Institutions, Democracy, Political Competition |
| JEL: | F36 O17 O43 |
| Date: | 2024–09–23 |
| URL: | https://d.repec.org/n?u=RePEc:qmw:qmwecw:981 |
| By: | Görg, Holger; Lehr, Jakob |
| Abstract: | This paper, for the first time, investigates the impact of foreign acquisitions on German manufacturing firms using, newly available unique administrative micro data spanning 25 years. Based on an event study design combined with propensity score matching techniques, we find that foreign acquisitions significantly increase labor productivity and average wages in acquired firms. A reduction in employment drives both effects. |
| Keywords: | Foreign direct investment, Foreign acquisitions, Firm behavior, Ex-post evaluation |
| JEL: | F23 F61 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:ifwkie:302104 |
| By: | Bondarenko, Yevheniia; Lewis, Vivien; Rottner, Matthias; Schüler, Yves |
| Abstract: | Geopolitical risk cannot be measured in a universal way. We develop new geopolitical risk indicators relying on local newspaper coverage to account for different perceptions. Using Russia as a case study, we demonstrate that geopolitical risk shocks identified from local news sources have significant adverse effects on the Russian economy, whereas geopolitical risk shocks identified from English-language news sources do not. We control for restricted press freedom by analyzing state-controlled and independent media separately. Employing a novel Russian sanctions index, we illustrate that geopolitical risk shocks propagate beyond the sanctions channel. Still, sanctions worsen the inflationary impact of geopolitical risk shocks substantially. |
| Keywords: | geopolitical risk, risk perceptions, Russia, sanctions, shock transmission |
| JEL: | E32 E44 E71 F44 F51 G41 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bubdps:302558 |