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on International Finance |
| By: | Guillaume Plantin (Département d'économie); Hyun Song Shin (Princeton University) |
| Abstract: | We offer a model of currency carry trades in which carry traders generate self-sustained excess returns if they coordinate on supplying excessive capital to a target economy. The interest-rate differential between their funding currency and the target currency is their coordination device. Such self-fulfilling pro table currency trades arise when the central bank of the target economy ignores the impact of carry-trade in flows on domestic asset prices, and responds only to their effect on inflation. We solve for a unique equilibrium that exhibits the classic pattern of the carry-trade recipient currency appreciating for extended periods, punctuated by sharp falls. |
| Keywords: | Currency Carry Trades; Inflation Targeting; Financial Instability |
| JEL: | G01 G15 E58 |
| Date: | 2015–04 |
| URL: | http://d.repec.org/n?u=RePEc:spo:wpmain:info:hdl:2441/6skkqt46r78qk9i6iliq48n6bm&r=ifn |
| By: | MGino Cenedese (Bank of England); Enrico Mallucci (London School of Economics (LSE)) |
| Abstract: | We study the relation between international mutual fund ows and the different return components of aggregate equity and bond markets. First, we decompose international equity and bond market returns into changes in expectations of future real cash payments, interest rates, exchange rates, and discount rates. News about future cash flows, rather than discount rates, is the main driver of international stock returns. This evidence is in contrast with the typical results reported only for the US. Inflation news instead is the main driver of international bond returns. Next, we turn to the interaction between these return components and international portfolio flows. We find evidence consistent with price pressure, short-term trend chasing, and short-run overreaction in the equity market. We also find that international bond flows to emerging markets are more sensitive to interest rate shocks than equity flows. |
| Keywords: | International Capital Flows, Return Decomposition, International Equity Markets, International Bond Markets, Mutual Funds |
| JEL: | F31 G15 |
| Date: | 2015–06 |
| URL: | http://d.repec.org/n?u=RePEc:cfm:wpaper:1514&r=ifn |
| By: | Matthew S. Yiu (Hong Kong Monetary Authority and ASEAN+3 Macroeconomic Research Office); Sahminan Sahminan (Bank Indonesia and ASEAN+3 Macroeconomic Research Office) |
| Abstract: | Quantitative Easing (QE) policies, adopted by the advanced economies since 2009, have led to abundant global liquidity. In the same period, the ASEAN-5 economies (Indonesia, Malaysia, the Philippines, Singapore and Thailand) have recorded strong capital inflows, particularly portfolio inflows. Asset prices, in particular house prices in these economies, have also experienced excess buoyancy. This paper studies the relationship between global liquidity, house prices and capital flows. Empirically, capital inflows have had a positive effect on residential house prices in Indonesia, Malaysia, the Philippines and Singapore. After accounting for domestic demand (using real GDP growth as a proxy), capital inflows have still had a positive impact in Indonesia and Singapore. The authorities of these economies have implemented similar macroprudential measures to safeguard financial stability and reduce speculative activity. The effectiveness of the measures has been seen mainly through a reduction in housing transactions. |
| Keywords: | Capital Flows, Residential House Price, Macroprudential, ASEAN Economies |
| JEL: | E44 E58 G28 R31 |
| Date: | 2015–06 |
| URL: | http://d.repec.org/n?u=RePEc:hkm:wpaper:142015&r=ifn |
| By: | Campbell, John Y; Giglio, Stefano W; Polk, Christopher; Turley, Robert |
| Abstract: | This paper studies the pricing of volatility risk using the first-order conditions of a long-term equity investor who is content to hold the aggregate equity market rather than tilting towards value stocks and other equity portfolios that are attractive to short-term investors. We show that a conservative long-term investor will avoid such tilts in order to hedge against two types of deterioration in investment opportunities: declining expected stock returns, and increasing volatility. Empirically, we present novel evidence that low-frequency movements in equity volatility, tied to the default spread, are priced in the cross-section of stock returns. |
| Keywords: | ICAPM; stochastic volatility; time-varying expected returns; value premium |
| JEL: | G12 N22 |
| Date: | 2015–06 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:10681&r=ifn |