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on International Finance |
| By: | Bernoth, Kerstin; Herwartz, Helmut; Trienens, Lasse |
| Abstract: | Using a data-driven identification approach of structural vector autoregressive models, we analyse the factors driving the US dollar exchange rate for a sample of eight advanced countries over the period 1980M1 to 2022M6. We find that the exchange rates are significantly affected not only by US monetary policy, but also by shocks to inflation expectations associated with shifts in fiscal sustainability concerns. In addition, external shocks related to global risk aversion and the convenience yield that investors are willing to give up to hold US dollar assets have a significant impact on the US dollar exchange rate. All three shocks considered make an important contribution to explaining US dollar exchange rate changes, with external shocks being the most impactful on average. Moreover, we find evidence that the monetary policy response to shocks to long-run inflation expectations has changed over time, suggesting shifts in monetary policy reaction functions. |
| JEL: | E52 C32 E43 F31 G15 F41 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:vfsc24:302351 |
| By: | Hodula, Martin; Janků, Jan; Malovaná, Simona; Ngo, Ngoc Anh |
| Abstract: | In our paper, we provide a review of the literature to identify the main transmission channels through which geopolitical risks (GPR) influence m a cro-financial st ab ility. We be gi n by analyzing the existing measures of geopolitical tensions and uncertainty, showing that GPR impacts economic and financial u n certainty e p isodically, w i th s i gnificant bu t tr an sient spikes during major geopolitical events. The review then identifies t he t wo p rincipal c hannels through which GPR affects macro-financial s t ability: t he fi nancial ch an nel, op erating th rough increased uncertainty and heightened risk aversion, leading to shifts in investment portfolio allocations and cross-border capital flows; a nd t he r eal e conomy c hannel, impacting global trade, s upply chains, and commodity markets. Using data from the past two to three decades, we provide graphical analyses that confirm t he fi ndings in the literature, hi ghlighting the episodic nature of the impact of GPR. These insights underscore the need for policymakers and financial i nstitutions t o adopt event-specific a p proaches t o e f fectively m i tigate t h e a d verse e f fects o f g e opolitical r i sks on economic and financial systems. |
| Keywords: | Financial stability, geopolitical risk, global economy, macro-financial impact, uncertainty shocks |
| JEL: | D80 E32 F44 F51 G2 G15 H56 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bofitp:303508 |
| By: | Marek Rutkowski; Huansang Xu |
| Abstract: | In this paper, we explore the pricing and hedging strategies for an innovative insurance product called the equity protection swap(EPS). Notably, we focus on the application of EPSs involving cross-currency reference portfolios, reflecting the realities of investor asset diversification across different economies. The research examines key considerations regarding exchange rate fluctuations, pricing and hedging frameworks, in order to satisfy dynamic requirements from EPS buyers. We differentiate between two hedging paradigms: one where domestic and foreign equities are treated separately using two EPS products and another that integrates total returns across currencies. Through detailed analysis, we propose various hedging strategies with consideration of different types of returns - nominal, effective, and quanto - for EPS products in both separate and aggregated contexts. The aggregated hedging portfolios contain basket options with cross-currency underlying asset, which only exists in the OTC market, thus we further consider a superhedging strategy using single asset European options for aggregated returns. A numerical study assesses hedging costs and performance metrics associated with these hedging strategies, illuminating practical implications for EPS providers and investors engaged in international markets. We further employ Monte Carlo simulations for the basket option pricing, together with two other approximation methods - geometric averaging and moment matching. This work contributes to enhancing fair pricing mechanisms and risk management strategies in the evolving landscape of cross-currency financial derivatives. |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2409.19387 |