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on International Finance |
| By: | Ila Patnaik; Ajay Shah |
| Abstract: | The literature on the investment technology of foreign versus domestic investors has inconclusive results. This paper revisits the question, with a focus on decomposing portfolio performance into asset allocation and security selection. We document signicant differences in exposure to systematic asset pricing factors between foreign and domestic investors. A quasi-experimental strategy is introduced, for comparing security selection after controlling for diferences in asset allocation. Our results show that foreign investors in India do remarkably poorly at security selection. |
| Keywords: | Investment;Foreign investment;Asset management;Asset prices;Emerging markets;Institutional Investor, Foreign Investors, Domestic Institutional Investors |
| Date: | 2013–04–22 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:13/90&r=ifn |
| By: | Ila Patnaik; Ajay Shah; Nirvikar Singh |
| Abstract: | Emerging market policy makers have been concerned about the financial stability implications of financial globalization. These concerns are focused on behavior under stressed conditions. Do tail events in the home country trigger off extreme responses by foreign investors – are foreign investors `fair weather friends'? In this, is there asymmetry between the response of foreign investors to very good versus very bad days? Do foreign investors have a major impact on domestic markets through large inflows or outflows – are they ‘big fish in a small pond’? Do extreme events in world markets induce extreme behavior by foreign investors, thus making them vectors of crisis transmission? We propose a modified event study methodology focused on tail events, which yields evidence on these questions. The results, for India, do not suggest that financial globalization has induced instability on the equity market. |
| Keywords: | Foreign investment;India;Stock markets;Emerging markets;Economic models;Event study, Extreme events, Foreign investors |
| Date: | 2013–05–22 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:13/122&r=ifn |
| By: | Ahmet Benlialper; Hasan Cömert |
| Abstract: | Especially, after the 2000s, many developing countries let exchange rates float and began implementing inflation targeting regimes based on mainly manipulation of expectations and aggregate demand. However, most developing countries implementing inflation targeting regimes experienced considerable appreciation trends in their currencies. Might have exchange rates been utilized as implicit tools even under inflation targeting regimes in developing countries? To answer this question and investigate the determinants of inflation under an inflation targeting regime, as a case study, this paper analyzes the Turkish experience with the inflation targeting regime between 2002 and 2008. There are two main findings of this paper. First, the evidence from a Vector Autoregressive (VAR) model suggests that the main determinants of inflation in Turkey during this period are supply side factors such as international commodity prices and the variation in exchange rate rather than demand side factors. �Since the Turkish lira (TL) was considerably over-appreciated during this period, it is apparent that the Turkish Central Bank benefited from the appreciation of the TL in its fight against inflation during this period. Second, our findings suggest that the appreciation of the TL is related to the deliberate asymmetric policy stance of the Bank with respect to the exchange rate. �Both the econometric analysis from a VAR model and descriptive statistics indicate that appreciation of the Turkish lira was tolerated during the period under investigation whereas depreciation was responded aggressively by the Bank. We call this policy stance under the inflation targeting regimes as “implicit asymmetric exchange rate peg”. �The Turkish experience indicates that, as opposed to rhetoric of central banks in developing countries, inflation targeting developing countries may have an asymeyric stance toward exchange rates and favour appreciation of their currencies to hit their inflation targets. In this sense, IT seems to contribute to the ignorance of dangers regarding to over-appreciation of currencies in developing countries. � � |
| Keywords: | Inflation Targeting, Central Banking, Developing Countries, Exchange Rates |
| JEL: | E52 E58 E31 F31 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:uma:periwp:wp333&r=ifn |
| By: | Loechel, Horst; Packham, Natalie; Walisch, Fabian |
| Abstract: | As part of its effort to internationalize the Renminbi, China's government has promoted the establishment of a regulated offshore Renminbi capital market hub in Hong Kong, where, among other activities, it issues RMB-denominated government bonds providing foreign investors access to Chinese bond markets. In a VAR model where yield curves are represented by Nelson-Siegel latent factors and which includes macroeconomic variables, we find that onshore government bond yields are primarily driven by policy-related factors such as the policy rate and money supply, whereas offshore government bond yields are additionally driven by market-related factors such as consumer confidence, GDP and FX rate expectations as well as liquidity constraints. At the current stage of market development there are virtually no spillover effects between the onshore and offshore government bond curves. Our results add quantitative evidence that China's efforts to internationalize its currency results in a simultaneous liberalization of its financial system. -- |
| Keywords: | Chinese government bond yields,Chinese offshore market,RMB,Hong Kong |
| JEL: | E43 E47 E63 G18 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:fsfmwp:202&r=ifn |
| By: | Michael W. Klein; Jay C. Shambaugh |
| Abstract: | A central result in international macroeconomics is that a government cannot simultaneously opt for open financial markets, fixed exchange rates, and monetary autonomy; rather, it is constrained to choosing no more than two of these three. In the wake of the Great Recession, however, there has been an effort to address macroeconomic challenges through intermediate measures, such as narrowly targeted capital controls or limited exchange rate flexibility. This paper addresses the question of whether these intermediate policies, which round the corners of the triangle representing the policy trilemma, afford a full measure of monetary policy autonomy. Our results confirm that extensive capital controls or floating exchange rates enable a country to have monetary autonomy, as suggested by the trilemma. Partial capital controls, however, do not generally enable a country to have greater monetary control than is the case with open capital accounts unless they are quite extensive. In contrast, a moderate amount of exchange rate flexibility does allow for some degree of monetary autonomy, especially in emerging and developing economies. |
| JEL: | E52 F3 F33 F41 |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:19461&r=ifn |
| By: | Luis Catão; Gian-Maria Milesi-Ferretti |
| Abstract: | We examine the determinants of external crises, focusing on the role of foreign liabilities and their composition. Using a variety of statistical tools and comprehensive data spanning 1970-2011, we find that the ratio of net foreign liabilities (NFL) to GDP is a significant crisis predictor, and the more so when it exceeds 50 percent in absolute terms and 20 percent of the country-specific historical mean. This is primarily due to net external debt--the effect of net equity liabilities is weaker and net FDI liabilities seem if anything an offset factor. We also find that: i) breaking down net external debt into its gross asset and liability counterparts does not add significant explanatory power to crisis prediction; ii) the current account is a powerful predictor, either measured unconditionally or as deviations from conventionally estimated “normsâ€; iii) foreign exchange reserves reduce the likelihood of crisis more than other foreign asset holdings; iv) a parsimonious probit containing those and a handful of other variables has good predictive performance in- and out-of-sample. The latter result stems largely from our focus on external crises stricto sensu. |
| Keywords: | External debt;Financial crisis;Current account;Foreign exchange;Foreign direct investment;Economic models;International Investment Positions, Sovereign Debt, Currency Crises, Current Account Imbalances, Foreign Exchange Reserves. |
| Date: | 2013–05–16 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:13/113&r=ifn |
| By: | Hau, Harald; Lai, Sandy |
| Abstract: | The eurozone has a single short-term nominal interest rate, but monetary policy conditions measured by either real short-term interest rates or Taylor rule residuals varied substantially across countries in the period from 2003-2010. We use this cross-country variation in the (local) tightness of monetary policy to examine its influence on equity and money market flows. In line with a powerful risk-shifting channel, we find that fund investors in countries with decreased real interest rates shift their portfolio investment out of the money market and into the riskier equity market. A ten-basis-point lower real short-term interest rate is associated with a 0.8% incremental money market outflow and a 1% incremental equity market inflow by local investors relative to asset under management. The latter produces the strongest equity price increase in countries where domestic institutional investors represent a large share of the countries' stock market capitalization. |
| Keywords: | asset price inflation; monetary policy; risk seeking; Taylor rule residuals |
| JEL: | G11 G14 G23 |
| Date: | 2013–08 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9581&r=ifn |
| By: | Acharya, Viral V; Afonso, Gara; Kovner, Anna |
| Abstract: | In August of 2007, banks faced a freeze in funding liquidity from the asset-backed commercial paper (ABCP) market. We investigate how banks scrambled for liquidity in response to this freeze and its implications for the real economy. Commercial banks in the United States raised deposits and took advances from Federal Home Loan Banks (FHLBs). In contrast, foreign banks – with limited access to the deposit market and FHLB advances – lent less in the overnight interbank market and borrowed more from the Federal Reserve’s Term Auction Facility (TAF) auctions. Relative to before the ABCP freeze and relative to their non US dollar lending, foreign banks with ABCP exposure charged higher interest rates on syndicated loan packages denominated in dollars. The results point to a funding risk in global banking, manifesting as currency shortages for banks engaged in maturity transformation in foreign countries. |
| Keywords: | ABCP freeze; credit crunch; liquidity |
| JEL: | G21 G28 |
| Date: | 2013–04 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9457&r=ifn |
| By: | Sonali Jain-Chandra; Min Jung Kim; Sung Ho Park; Jerome Shin |
| Abstract: | Korea was hit hard by the 2008 global financial crisis, with the foreign bank deleveraging channel coming prominently into play. The global financial crisis demonstrated that a sharp deleveraging can be transmitted to emerging markets through the bank lending channel to a slowdown in credit growth. The analysis finds that a sharp decline in external funding led to relatively modest decline in domestic credit by Korean banks, due to concerted policy efforts by the government in 2008. Impulse responses from a Dynamic Stochastic General Equilibrium (DSGE) model calibrated to Korea shows that it appears better prepared to handle such shocks relative to 2008. Indeed, Korea is much more resilient to such shocks due to the efforts by the authorities, which has led to the strengthening of external buffers, such as higher foreign exchange reserves and bilateral and multilateral currency swap arrangements. |
| Keywords: | International banks;Korea, Republic of;Global Financial Crisis 2008-2009;External shocks;Banking sector;Liquidity;Financial crisis;Economic models;Global banks, liquidity shock, cross-border lending |
| Date: | 2013–05–08 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:13/101&r=ifn |
| By: | Della Corte, Pasquale; Ramadorai, Tarun; Sarno, Lucio |
| Abstract: | We investigate the predictive information content in foreign exchange volatility risk premia for exchange rate returns. The volatility risk premium is the difference between realized volatility and a model-free measure of expected volatility that is derived from currency options, and reflects the cost of insurance against volatility ‡fluctuations in the underlying currency. We find that a portfolio that sells currencies with high insurance costs and buys currencies with low insurance costs generates sizeable out-of-sample returns and Sharpe ratios. These returns are almost entirely obtained via predictability of spot exchange rates rather than interest rate differentials, and these predictable spot returns are far stronger than those from carry trade and momentum strategies. Canonical risk factors cannot price the returns from this strategy, which can be understood, however, in terms of a simple mechanism with time-varying limits to arbitrage. |
| Keywords: | Exchange Rate; Hedgers; Order Flow; Predictability; Speculators; Volatility Risk Premium |
| JEL: | F31 F37 G12 G13 |
| Date: | 2013–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9549&r=ifn |
| By: | Degryse, Hans; Lu, Liping; Ongena, Steven |
| Abstract: | The recent financial crisis has reopened the debate on the impact of informal and formal finance on firm growth in developing countries. Using unique survey data, we find that informal finance is associated with higher sales growth for small firms and lower sales growth for large firms. We identify a complementary effect between informal and formal finance for the sales growth of small firms, but not for large firms. Informal finance offers informational and monitoring advantages, while formal finance offers relatively inexpensive funds. Co-funding, i.e. the simultaneous use of formal and informal finance, is the optimal choice for small firms. |
| Keywords: | Co-Funding; Formal Finance; Growth; Informal Finance |
| JEL: | G21 G32 P2 |
| Date: | 2013–06 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9519&r=ifn |