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on International Finance |
| By: | Vladimir Sokolov (National Research University Higher School of Economics); Alexey Gorodilov (National Research University Higher School of Economics) |
| Abstract: | We examine the relationship between net revaluations of foreign currency-denominated assets and liabilities and banks' liquidity creation. Our findings reveal a significant effect on FX-USD liquidity creation: revaluations enhance liquidity creation on the asset side but diminish it on the liability side, leading to a total neutral effect. Subsample analysis reveals that banks with positive FX mismatches face liquidity destruction in FX-USD liabilities during exchange rate shocks, whereas negatively FX-mismatched banks use these shocks to extend long-term FX loans, balancing total liquidity creation. For accounts denominated in the domestic currency, no significant effects of net revaluations are observed for liquidity creation on the full sample. For positively FX-mismatched banks net revaluations enhance total liquidity creation, while for negatively FX-mismatched banks reduce it, resulting in an overall neutral outcome for domestic currency liquidity creation. Furthermore, regulatory capital moderates the impact of revaluations on liquidity creation through the financial fragility mechanism. These results underscore the complex interplay of currency risks, balance sheet FX mismatches, and regulatory dynamics in influencing liquidity creation in emerging markets. |
| Keywords: | liquidity creation, currency revaluation, bank’s capital, foreign currency mismatch |
| JEL: | G21 G28 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:hig:wpaper:99/fe/2025 |
| By: | Imbierowicz, Björn; Nagengast, Arne J.; Prieto, Esteban; Vogel, Ursula |
| Abstract: | The pace of globalization has slowed since the global financial crisis, raising concerns about widespread deglobalization and market fragmentation. We examine the effects of a deglobalization shock on bank lending, firm internal capital markets, and the real economy. Leveraging a unique dataset that combines a credit register with foreign direct investment (FDI) data, we are able to observe both domestic and cross-border credit exposures of German banks as well as internal capital market dynamics within multinational corporations (MNCs) - a feature rarely available in other countries' data. We analyze the response to the Brexit referendum shock. On average, German banks reduced lending to United Kingdom (UK) firms following the shock due to increased uncertainty about future losses. More prudent banks reduced their credit more extensively, and less profitable subsidiaries experienced greater reductions. However, UK subsidiaries of large MNCs, with access to internal capital markets, offset this credit supply shock through internal funding, shielding them from negative real effects. We find that non-UK subsidiaries play a crucial role in internal capital markets by securing external financing and reallocating funds to support UK affiliates. Well capitalized banks reallocated lending to firms outside the UK, particularly those of German MNCs. Our findings underscore that while international financial frictions following deglobalization shocks can imply negative real effects, firms integrated into global networks mitigate these impacts through internal capital markets. |
| Keywords: | Bank lending, deglobalization shock, policy uncertainty, real-financial linkages, internal capital markets |
| JEL: | F23 F34 F36 G21 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bubdps:314411 |
| By: | Vasilios Plakandaras (Department of Economics, Democritus University of Thrace, Komotini, Greece); Rangan Gupta (Department of Economics, University of Pretoria, Private Bag X20, Hatfield 0028, South Africa); Qiang Ji (Institutes of Science and Development, Chinese Academy of Sciences, Beijing, China; School of Public Policy and Management, University of Chinese Academy of Sciences, Beijing, 100049, China) |
| Abstract: | The study investigates systemic financial risk in global markets, attributing it to geopolitical instability, climate risks, and economic uncertainties. Utilizing a state-of-the-art machine learning heterogeneous panel regression framework capable of capturing cross-sectional dependencies and nonlinear patterns, we examine financial stress across multiple economies, including China, the U.S., the U.K., and ten EU nations. Through extensive out-of-sample rolling window analysis, we show that while geopolitical uncertainty enhances short-term predictions, long-term risk forecasting is better achieved using financial and economic data. The study underscores the limitations of conventional regression models in capturing financial risk dynamics and suggests that machine learning-based panel regressions provide a more nuanced and accurate forecasting tool. The findings bear significant policy implications, highlighting the necessity for regulatory bodies to reassess risk frameworks and the role of climate-related disclosures in financial markets. |
| Keywords: | Systemic financial risk, machine learning, forecasting, climate risk, geopolitical risk |
| JEL: | C45 C58 G17 |
| Date: | 2025–03 |
| URL: | https://d.repec.org/n?u=RePEc:pre:wpaper:202511 |
| By: | ONISHI Fuyuko (Bank of Japan); HIRAI Yuichiro (Bank of Japan); ARUGA Ryo (Bank of Japan); BESSHO Hidemi (Bank of Japan) |
| Abstract: | In the foreign exchange market, electronic trading (e-FX) has developed and expanded, bringing benefits such as lower trading costs and more trading options. To take advantage of these benefits, e-FX customers need to choose appropriate trading venues and methods. In addition, the development of e-FX has led to a fragmentation of liquidity in the foreign exchange market, making it more difficult to monitor market trends, and there are concerns that price discovery in the foreign exchange market may be undermined in the future. Furthermore, as the e-FX infrastructure advances internationally, the presence of the Tokyo market as a financial center may be affected, involving an outflow of foreign exchange transactions. |
| Keywords: | Foreign Exchange Market; Electronic Trading; Market Structure |
| JEL: | F31 G12 G15 |
| Date: | 2025–03–24 |
| URL: | https://d.repec.org/n?u=RePEc:boj:bojrev:rev25e04 |
| By: | Peter Albrecht (Mendel University in Brno, Faculty of Business and Economics); Evzen Kocenda (Institute of Economic Studies, Charles University, Prague) |
| Abstract: | Our study presents an in-depth analysis of the connectedness in returns among five major cryptocurrencies over a span from 2018 to 2023. Our work introduces novel insights via employing a recently developed bootstrap-after-bootstrap method of Greenwood-Nimmo et al. (2024) to establish a link between increases in connectedness and various systematic events. We find that major events-including both market and policy-driven shocks-trigger substantial increases in connectedness, with transmission effects persisting for up to one month. For the period under research, we identify Bitcoin and Ethereum as net return transmitters, mainly to Binance coin and Ripple. Moreover, we find that these transmissions increased by up to 20% for up to one month after the shocks occurred. Furthermore, we incorporate event-driven adjustments in portfolio optimization, quantifying optimal asset weight rebalancing in response to cryptocurrency market shocks. Our findings reveal that during the research period, Cardano and Ripple were 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 Q4 |
| Date: | 2025–03 |
| URL: | https://d.repec.org/n?u=RePEc:kyo:wpaper:1113 |
| By: | Mehmet Burak Turgut (University of Warsaw, Faculty of Economic Sciences); Grzegorz Wesołowski (University of Warsaw, Faculty of Economic Sciences) |
| Abstract: | This paper investigates the domestic and international transmission of U.S. fiscal news shocks emphasizing the importance of the sentiment channel for the global economy. We identify these shocks using federal government spending forecasts from the Survey of Professional Forecasters. Employing the local projection method, we find that anticipated increases in U.S. government spending are expansionary domestically, leading to improved sentiment and enhanced financial conditions. On the other hand, the U.S. dollar appreciates, and the U.S. trade balance deteriorates when future fiscal expansion is expected. In the international context, we apply panel local projection models across a broad set of countries and show that positive sentiment and improved financial conditions driven by U.S. fiscal news spill over, stimulating demand and output growth in other economies. However, we find no significant effect of currency depreciation on net exports in a broad sample as rising domestic demand tends to boost imports. In turn, in a subsample of countries with high trade exposure to the U.S., the trade channel becomes significant, while financial channel diminishes in importance. At the same time, sentiment channel appears to play a significant role in all subsamples. Finally, we find that positive fiscal news shocks have strong stimulating effects (both domestic and international) during US recessions but not in expansions. |
| Keywords: | government spending, news shock, international spillovers, international business cycles |
| JEL: | C32 C33 E32 E62 F41 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:war:wpaper:2025-05 |
| By: | Heidorn, Thomas; Liem, Erik; Requardt, Stefan; Wahnschaap, Tim |
| Abstract: | This paper examines the transition from LIBOR to SOFR in the US and maps out the consequences for European corporate treasurers by showing how the application of SOFR in cash products and derivatives differs from LIBOR. As interest rate and cross-currency swaps transition to compounded SOFR, corporates may face a trade-off between the higher costs of using Term SOFR versus facing operational difficulties with their internal treasury systems when using compounded SOFR in arrears. With respect to European corporates, challenges arising from the new in arrears conventions should be less pronounced since EURIBOR coexists next to €STR, which means that corporates may continue to use term rates set in advance when they choose to swap U.S. dollar exposure into euros. |
| Keywords: | LIBOR, Benchmark Reform, SOFR, Term SOFR, RFRs, Interest Rate Swaps, Cross Currency Swap, Corporate Treasury |
| JEL: | G12 G23 G28 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:fsfmwp:314425 |