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on International Finance |
| By: | Hélène Rey; Vania Stavrakeva; Jenny Tang |
| Abstract: | The paper explores empirically the tight links between exchange rates and the global network of equity holdings. Exchange rates can be expressed in terms of “equity net currency supplies”, i.e. local currency stock market capitalization minus equity holdings, denominated in investors’ currencies, as well as elasticities, reflecting the “centrality” of currencies in global equity markets. The observed components of our exchange rate decomposition account for, on average, 95% of the monthly variation of 28 bilateral currency crosses vis-à-vis the USD and 98% vis-à-vis the EUR. We use the decomposition to elucidate the unique role of the USD in transmitting risk aversion and U.S. macroeconomic news throughout the global equity network. Our findings contribute towards explaining global financial cycles and “risk-on”/“risk-off” episodes. |
| JEL: | F30 F32 F40 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33003 |
| By: | Peteris Kloks (University of St. Gallen); Edouard Mattille (University of St. Gallen); Angelo Ranaldo (University of Basel - Faculty of Business and Economics; Swiss Finance Institute; University of St. Gallen) |
| Abstract: | Using novel granular data on the global flows of wholesale and synthetic dollar funding, we show that constrained non-US banks substitute dollar borrowing from US repo markets with foreign exchange (FX) swaps at the quarter-end. As wholesale borrowing is encumbered by shadow costs, non-US banks satisfy their inelastic dollar demand by obtaining synthetic funding, for which they are willing to pay a heightened cross currency basis. Eurozone banks in particular hunt for dollars by engaging in such repo-FX swap substitution, with the benefits largely accruing to US dealers. Our study explains the increase in synthetic dollar borrowing and deviations from covered interest rate parity (CIP) observed at the quarter-end and uncovers how global banks manage short-term dollar liquidity across multiple money markets. |
| Keywords: | US Dollar, Global Banks, FX Swaps, Repos, Intermediary Constraints, Covered Interest Parity, Regulation |
| JEL: | F31 G12 G15 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:chf:rpseri:rp2452 |
| By: | Rohan Kekre; Moritz Lenel |
| Abstract: | We study the source of exchange rate fluctuations using a general equilibrium model accommodating shocks in goods and financial markets. These shocks differ in their induced comovements between exchange rates, interest rates, and quantities. A calibration matching data from the U.S. and G10 currency countries implies that persistent shocks to relative demand, reflected in persistent interest rate differentials, account for 75% of the variance in the dollar/G10 exchange rate. Shocks to currency intermediation are important, however, in generating deviations from uncovered interest parity at high frequencies and explaining the dollar appreciation in crises. |
| JEL: | E44 F31 G15 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32976 |
| By: | Omar Barbiero; Falk Bräuning; Gustavo Joaquim; Hillary Stein |
| Abstract: | We leverage supervisory microdata to uncover the role of global banks' risk limits in driving exchange rate dynamics. Consistent with a model of currency intermediation under risk constraints, shocks to dealers’ risk limits lead to price and quantity adjustments in the foreign exchange market. We show that dealers adjust their net position and increase the bid–ask spread in response to granularly identified limit shocks, leading to lower turnover and an adjustment in currency returns. These shocks exacerbate the effects of net currency demand on exchange rate movements, as predicted by theory, and trigger deviations from covered interest parity. |
| Keywords: | exchange rates; currency returns; market making; risk constraints; financial intermediation |
| JEL: | F31 G15 G21 |
| Date: | 2024–08–01 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedbwp:98847 |
| By: | Ester Faia; Karen K. Lewis; Haonan Zhou |
| Abstract: | We re-examine monetary policy spillovers to Emerging Market Economies (EME) in the form of capital flow reversals, using sectoral-level securities holdings data for Euro Area investors. In response to a surprise monetary tightening, active investors such as investment funds re-balance their portfolios away from EME, while more passive, long term investors such as insurance funds and banks exhibit no significant reaction on average. For active investors, the reallocation out of EME appears stronger under synchronized monetary tightening between the Fed and the ECB. However, these investors may even inject more capital to EME securities when the monetary tightening surprises contain positive news about the Euro Area economy. Issuers' monetary-fiscal stability may explain the heterogeneous impact of these spillovers. |
| JEL: | E44 F32 F33 G15 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32986 |