|
on International Finance |
| By: | Tsvetelina Nenova; Andreas Schrimpf; Hyun Song Shin |
| Abstract: | We show that outstanding volumes in FX swaps serve as a good indicator for the hedging activity associated with portfolio positions of advanced economy bond investors. As such, FX swaps serve as a key barometer of risk-taking and global financial conditions. We develop a simple portfolio choice model for international bond investors and use it to estimate the relationship between global FX hedging activity, relative investment opportunities (captured by the yield curve slopes in respective economies), and the hedging costs associated with underlying investments. We find that higher FX hedging activity is closely associated with US portfolio debt inflows and outflows, indicating that FX hedging plays a crucial role in facilitating cross-border bond investments. This connection between FX hedging motives, portfolio bond flows, and the yield curve highlights a mechanism of international financial spillovers - not only from the US but also from advanced economies with significant accumulated wealth flowing into the US. |
| Keywords: | global portfolio investments, FX hedging, financial conditions |
| JEL: | F31 F32 F42 G15 |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1273 |
| By: | Martijn Boermans |
| Abstract: | Governments across the world have issued inflation-linked debt to finance their deficits. Recent advances in asset pricing models recognize that there may be clientele effects that affect relative prices, especially in bond markets. We study investor demand for inflation-linked bonds using detailed bond portfolio data. Our analysis reveals pronounced market segmentation: insurance companies, with predominantly nominal liabilities, underinvest in inflation-linked securities, while pension funds overinvest. Investors hedging inflation risk exhibit a strong preference for bonds indexed to domestic rather than foreign inflation. A regulatory reform announcement provides quasi-experimental evidence that the demand for inflation-linked bonds may be shaped by regulatory requirements. |
| Keywords: | sovereign bonds; inflation-linked bonds; TIPS; investor clientele; securities holdings |
| JEL: | F21 G11 G15 G22 G23 |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:dnb:dnbwpp:838 |
| By: | Hyun Song Shin; Philip Wooldridge; Dora Xia |
| Abstract: | Currency hedging by non-US investors holding US dollar securities appears to have made an important contribution to the weakness of the dollar in April and May 2025. In recent years, the strength of the dollar and high currency hedging costs driven by elevated short-term dollar interest rates had discouraged non-US investors from hedging their US dollar exposures. Clues as to the location of currency hedging activity can be gleaned from intraday exchange rate movements. In April, the largest declines in the US dollar occurred during Asian trading hours, suggesting an important role for Asian investors. |
| Date: | 2025–06–20 |
| URL: | https://d.repec.org/n?u=RePEc:bis:bisblt:105 |
| By: | Mr. Eugenio M Cerutti; Melih Firat; Martina Hengge |
| Abstract: | Cross-border payments are essential to the global financial system, facilitating trade and investment. The global cross-border traditional and crypto payment market approached a value of about one quadrillion dollars in 2024, with crypto payments representing only a small fraction despite their recent surge. Focusing on data from Swift—the largest traditional cross-border financial messaging network—we study the characteristics and evolving patterns of these payments over 2021-24. Notably, payments are predominantly concentrated in advanced economies, and are driven by financial institutions and large transactions. While currency usage remains stable—with the U.S. dollar maintaining the largest share—the Chinese renminbi demonstrates signs of increasing global integration, albeit from a low base. Gravity model estimates confirm that traditional economic linkages, via trade, portfolio investment, and FDI, shape cross-border payments. However, aggregate dynamics mask substantial heterogeneity across message types (customer vs. financial related payments), currencies, and transaction sizes, with information asymmetries playing a diminished role in larger payments. |
| Keywords: | Cross-Border Payments; Trade; FDI; Portfolio Investment; Networks |
| Date: | 2025–06–13 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2025/120 |
| By: | Marco Jacopo Lombardi; Cristina Manea; Andreas Schrimpf |
| Abstract: | We construct a new financial conditions index for the United States based on a dynamic factor model applied to a broad set of financial prices and yields. The resulting two latent factors capture, respectively, the general level of safe interest rates and an overall measure of perceived and priced financial risk. Analysing the interaction between these factors and the macroeconomy, we find that: (i) both factors are affected significantly by monetary policy; (ii) positive shifts in both factors lead to a persistent contraction in economic activity; (iii) relative to the safe interest rates factor, the risk–related factor exhibits stronger predictive power for economic activity. Our results are consistent with both the demand and the credit channels of monetary policy being at work, and emphasize that isolating movements in safe interest rates from shifts in perceived financial risk is essential to accurately assess the transmission of financial conditions to economic activity. |
| Keywords: | financial conditions, monetary policy, financial accelerator, dynamic factor model |
| JEL: | C38 E52 G10 |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1272 |
| By: | Itskhoki, Oleg; Mukhin, Dmitry |
| Abstract: | We use a general open-economy wedge-accounting framework to characterize the set of shocks that can account for major exchange rate puzzles. Focusing on a near-autarky behavior of the economy, we show analytically that all standard macro economic shocks—including productivity, monetary, government spending, and markup shocks—are inconsistent with the broad properties of the macro exchange rate disconnect. News shocks about future macro economic fundamentals can generate plausible exchange rate properties. However, they show up prominently in contemporaneous asset prices, which violates the finance exchange rate disconnect. International shocks to trade costs, terms of trade and import demand, while potentially consistent with disconnect, do not robustly generate the empirical Backus–Smith, UIP and terms-of-trade properties. In contrast, the observed exchange rate behavior is consistent with risk-sharing (financial) shocks that arise from shifts in demand of foreign investors for home-currency assets, or vice versa. |
| JEL: | F31 F41 |
| Date: | 2024–06–25 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:123704 |
| By: | Antonis Ballis |
| Abstract: | Global financial systems are undergoing strategic shifts as geopolitical tensions reshape international trade and payments. The United States (US)-China trade war, sanctions regimes, and rising concerns over the weaponization of financial infrastructures like SWIFT have led countries to seek alternative networks, including China's CIPS and emerging cross-border CBDCs. This letter presents a dynamic theoretical framework where sanction risks, investment choices, and network effects drive payment system migration. Empirical evidence from Russia, Saudi Arabia, India, and Argentina supports the model. Policy implications point toward increasing financial fragmentation, with critical roles for international institutions to mitigate systemic risks. The future of finance may be less global and more regionally fragmented, influenced heavily by political considerations. |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2505.21480 |