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on International Finance |
| By: | Guglielmo Maria Caporale; Faek Menla-Ali |
| Abstract: | This paper analyses the short- and long-term effects of geopolitical uncertainty on cross-border portfolio flows between the US and 41 developed and emerging economies over the period January 1992-November 2022. We find that geopolitical uncertainty decreases equity inflows from other countries into the US in both the short- and long-term, with this flight home effect generally peaking after 6 months. We investigate the underlying mechanisms and show that the erosion of net financial worth, the evaporation of liquidity and rising risk premia are the key channels through which geopolitical uncertainty affects these inflows, supporting theoretical capital flow models with portfolio choice that feature information and related frictions. By contrast, the responses of other types of flows to geopolitical uncertainty are generally weak and are only found when accounting for the role of some cross-sectional heterogeneity and its time variation. |
| Keywords: | cross-border portfolio flows, equity and bond inflows and outflows, geopolitical risk, push and pull factors, local projections, risk premia |
| JEL: | F32 F36 F41 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11337 |
| By: | Bräuer, Leonie; Hau, Harald |
| Abstract: | Over the past decade, European investment funds have substantially increased their investment in dollar-denominated assets to more than 3.8 USD trillion, which should give raise to substantial currency hedging if US investor have reciprocal currency exposures in their international portfolios. Using comprehensive new contract level data (EMIR) for the period 2019-2023, we explore how the FX derivative trading by European funds compares to a feasible theoretical benchmark of optimal hedging. We find that hedging behaviour by all fund types is often partial, unitary (i.e., with a single currency focus), and sub-optimal. Overall, the observed FX derivative trading does not significantly reduce the return risk of the average European investment funds, even though optimal hedging strategies could without incurring substantial trading costs. JEL Classification: E44, F31, F32, G11, G15, G23 |
| Keywords: | global currency hedging, institutional investors, mean-variance optimization |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:srk:srkwps:2024148 |
| By: | Otaviano Canuto; Amshika Amar |
| Abstract: | When countries face external financial shocks, they must rely on financial buffers to counter such shocks. The global financial safety net is the set of institutions and arrangements that provide lines of defense for economies against such shocks. From any individual country standpoint, there are three lines of defense in their external financial safety nets: international reserves, pooled resources (swap lines and plurilateral financing arrangements), and the International Monetary Fund. We argue here that there is a need to extend and facilitate access to the ultimate global financial safety net layer: the IMF. We illustrate that by pointing out how Morocco and Mexico have boosted their defensive power by having access to IMF precautionary lines of credit. *The authors wish to thank Abdelaaziz Ait Ali for comments on an earlier version, without implicating him in any way. |
| Date: | 2024–02 |
| URL: | https://d.repec.org/n?u=RePEc:ocp:rpaeco:pp_01-24 |
| By: | Matías Moretti; Lorenzo Pandolfi; Mr. German Villegas Bauer; Mr. Sergio L. Schmukler; Tomás Williams |
| Abstract: | We present evidence of inelastic demand for risky sovereign bonds and explore its implications for optimal government debt policies. Using monthly changes in the composition of a major international bond index, we identify flow shocks unrelated to fundamentals that shift the available bond supply. From these shocks, we estimate an inverse demand elasticity of -0.30 and show that it increases with countries’ default risk. We formulate a sovereign debt model with endogenous default and inelastic investors, calibrated to our empirical estimates. By penalizing additional borrowing, an inelastic demand acts as a disciplining device that reduces default risk and bond spreads. |
| Keywords: | inelastic financial markets; institutional investors; international capital markets; sovereign debt |
| Date: | 2024–11–01 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2024/227 |