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on Open Economy Macroeconomics |
| By: | Della Corte, Pasquale; Riddiough, Steven; Sarno, Lucio |
| Abstract: | We show that a global imbalance risk factor that captures the spread in countries' external imbalances and their propensity to issue external liabilities in foreign currency explains the cross-sectional variation in currency excess returns. The economic intuition is simple: net debtor countries offer a currency risk premium to compensate investors willing to finance negative external imbalances because their currencies depreciate in bad times. This mechanism is consistent with exchange rate theory based on capital flows in imperfect financial markets. We also find that the global imbalance factor is priced in cross sections of other major asset markets. |
| Keywords: | carry trade; currency risk premium; foreign exchange excess returns; global imbalances |
| JEL: | F31 F37 G12 G15 |
| Date: | 2016–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:11129&r=opm |
| By: | Johanna Krenz (Humboldt-Universitaet zu Berlin) |
| Abstract: | I propose a framework to think about the global comovement in macroeconomic variables during the recent financial crisis. The framework is used to address one question in particular: what is the role of banks’ balance sheet exposure to foreign assets for the international transmission of country-specific shocks? It is shown that this role depends on the nature of the shock: balance sheet exposure is essential for global comovement in the case of capital quality shocks. Conditional on technology shocks and shocks to the net worth of bankers, however, the share of foreign assets in banks’ portfolios does not play a decisive role for cross-country correlations. This implies that an evaluation of the risks arising from financial integration needs to take into account the nature of the shocks which are likely to hit the economy. An additional result of the model is that if financial institutions undertake the international portfolio choice decision instead of households, they do not necessarily choose the portfolio which yields the highest degree of consumption risk sharing. Given that a large part of international portfolio holdings are managed by financial intermediaries, this provides a possible explanation for the well-known empirical finding of modest international risk sharing despite open financial markets. |
| Keywords: | international transmission, financial frictions, capital quality shocks, risk sharing, portfolio choice |
| JEL: | E44 F30 F44 |
| Date: | 2016–02–01 |
| URL: | http://d.repec.org/n?u=RePEc:bdp:wpaper:2016003&r=opm |
| By: | Eichler, Stefan; Roevekamp, Ingmar |
| Abstract: | We introduce a novel currency risk measure based on American Depositary Receipts (ADRs). Using a multifactor pricing model, we exploit ADR investors’ exposure to potential devaluation losses to derive an indicator of currency risk. Using weekly data for a sample of 831 ADRs located in 23 emerging markets over the 1994-2014 period, we find that a deterioration in the fiscal and current account balance, as well as higher inflation, increases currency risk. Interaction models reveal that these macroeconomic fundamentals drive currency risk, particularly in countries with managed exchange rates, low levels of foreign exchange reserves and a poor sovereign credit rating. |
| Keywords: | Currency risk, Currency crises, American Depositary Receipts, Emerging markets |
| JEL: | F31 F37 G12 G15 |
| Date: | 2016–02 |
| URL: | http://d.repec.org/n?u=RePEc:han:dpaper:dp-572&r=opm |
| By: | Mohamed Arouri; Arif Billah Dar; Niyati Bhanja; Aviral Kumar Tiwari; FrédéricTeulon |
| Date: | 2016–02–18 |
| URL: | http://d.repec.org/n?u=RePEc:ipg:wpaper:2014-88&r=opm |
| By: | Sen, Hüseyin (BOFIT); Kaya, Ayse (BOFIT) |
| Abstract: | This study empirically examines the validity of the twin and triple deficits hypotheses using bootstrap panel Granger causality analysis and an annual panel data set of six post-communist countries (Russia, Poland, Ukraine, Romania, the Czech Republic, and Hungary) from 1994 to 2012. Our findings, based on panel data analysis under cross-sectional dependence and country-specific heterogeneity, support neither the twin deficits hypothesis nor its extended version, the triple deficits hypothesis, for any of the countries considered. In other words, we find no Granger-causal relationship between budget deficits and trade (or current account) deficits or among budget deficits, private savings-investment deficits, and trade deficits. |
| Keywords: | macroeconomic policy; fiscal policy; twin deficits; triple deficits; post-communist countries; transition economies; bootstrap panel granger causality test |
| JEL: | E60 F30 F32 H62 |
| Date: | 2016–02–18 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofitp:2016_003&r=opm |
| By: | Tidiane Kinda; Montfort Mlachila; Rasmané Ouedraogo |
| Abstract: | This paper investigates the impact of commodity price shocks on financial sector fragility. Using a large sample of 71 commodity exporters among emerging and developing economies, it shows that negative shocks to commodity prices tend to weaken the financial sector, with larger shocks having more pronounced impacts. More specifically, negative commodity price shocks are associated with higher non-performing loans, bank costs and banking crises, while they reduce bank profits, liquidity, and provisions to nonperforming loans. These adverse effects tend to occur in countries with poor quality of governance, weak fiscal space, as well as those that do not have a sovereign wealth fund, do not implement macro-prudential policies and do not have a diversified export base. These findings are robust to a battery of robustness checks. |
| Keywords: | Commodity price shocks;financial sector fragility, commodity, price, commodity price, prices, financial sector, General, Financial Markets and the Macroeconomy, Government Policy and Regulation, All Countries, financial sector fragility., |
| Date: | 2016–02–01 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:16/12&r=opm |
| By: | Bertrand Candelon |
| Date: | 2016–02–18 |
| URL: | http://d.repec.org/n?u=RePEc:ipg:wpaper:2014-46&r=opm |