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on International Finance |
| By: | Kubitza, Christian; Sigaux, Jean-David; Vandeweyer, Quentin |
| Abstract: | We study the implications of deviations from covered interest rate parity for international capital flows using novel data covering euro-area derivatives and securities holdings. Consistent with a dynamic model of currency risk hedging, we document that investors’ holdings of USD bonds decrease following a widening in the USD-EUR cross-currency basis (CCB). This effect is driven by investors with larger FX rollover risk and hedging mandates, and it is robust to instrumenting the CCB. These shifts in bond demand significantly affect bond prices. Our findings shed light on a new determinant of international capital flows with important consequences for financial stability. JEL Classification: F21, F31, G11, G21, G22, G23, E44 |
| Keywords: | currency hedging, derivatives, foreign exchange, FX swap, institutional investors |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20253017 |
| By: | Peter Albrecht; Evžen Kočenda; Evžen Kocenda |
| Abstract: | Our study presents an in-depth analysis of the interconnectedness in returns among five major cryptocurrencies from 2018 to 2023. Our work introduces novel findings by employing a novel bootstrap-after-bootstrap method of Greenwood-Nimmo et al. (2024) to establish a link between increases in connectedness and various systematic events. We found a clear rise in connectedness within a month following the event for ten endogenously selected events. Further, we identify Bitcoin and Ethereum as net return transmitters, mainly to Binance coin and Ripple. Moreover, we found that these transmissions increased by up to 20% for up to one month after the shocks occurred. We calculate optimal portfolio weights and hedging ratios for cryptocurrency risk management. Our findings reveal that Cardano and Ripple are the most effective choices in portfolio optimization. The implications of this study are significant for devising strategies in portfolio management and risk hedging, offering valuable guidance for policy formulation in the financial sector. |
| Keywords: | return connectedness, cryptocurrencies, bootstrap-after-bootstrap procedure, portfolio composition and hedging |
| JEL: | H56 G11 G15 Q40 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11658 |
| By: | Kang , Jong Woo (Asian Development Bank); Cabaero , Carlos (Asian Development Bank) |
| Abstract: | Foreign exchange (FX) trading volume is a key factor in exchange rate volatility. Given the important role of volatility in economic growth and stability, this paper investigates the dynamic nature of exchange trading volume on exchange rate volatility using hourly high-frequency data. The estimation results from ordinary least squares, fixed effects and the general autoregressive conditional heteroskedasticity model point to a significant impact of third-party foreign exchange trade volumes on the FX volatilities of original currency pairs. The United States dollar (USD), as the dominant currency, exerts sizeable effect through this third-party channel and the magnitude of the foreign exchange trading volume turns out to be a crucial factor to this effect. However, third-party currency pairs without USD linkages also exert non-negligible impact, calling for renewed attention to the effectiveness of regional financial cooperation in mitigating exchange rate volatility as compared with major foreign exchange trading partners, not only through direct transaction mechanisms but through third party currency channels. |
| Keywords: | FX volatility; third party channel; GARCH model |
| JEL: | F31 G15 G18 |
| Date: | 2025–02–06 |
| URL: | https://d.repec.org/n?u=RePEc:ris:adbewp:0768 |