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on International Finance |
| By: | Stefan Avdjiev; Robert Neil McCauley; Hyun Song Shin |
| Abstract: | The traditional approach to international finance is to view capital flows as the financial counterpart to savings and investment decisions, assuming further that the GDP boundary defines both the decision-making unit and the currency area. This "triple coincidence" of GDP area, decision-making unit and currency area is an elegant simplification but misleads when financial flows are important in their own right. First, the neglect of gross flows, when only net flows are considered, can lead to misdiagnoses of financial vulnerability. Second, inattention to the effects of international currencies may lead to erroneous conclusions on exchange rate adjustment. Third, sectoral differences between corporate and official sector positions can distort welfare conclusions on the consequences of currency depreciation, as macroeconomic risks may be underestimated. This paper illustrates the pitfalls of the triple coincidence through a series of examples from the global financial system in recent years and examines alternative analytical frameworks based on balance sheets as the unit of analysis. |
| Keywords: | capital flows, global liquidity, international currencies |
| Date: | 2015–10 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:524&r=all |
| By: | Karolyi, G. Andrew (Cornell University); Ng, David T. (Cornell University); Prasad, Eswar (Cornell University) |
| Abstract: | We examine how emerging market (EM) investors allocate their stock portfolios internationally. Using both country-level and institution-level data, we find that the coming wave of EM investors systematically over- and under-weight their holdings in some target countries. These abnormal foreign allocation biases of EM investors offer robust support of the information endowment hypothesis of van Nieuwerburgh and Veldkamp (2009). Specifically, past capital and trade flows from a foreign country to the home country create an information endowment (or advantage) that lead home country investments to be overweight that foreign country. At the institutional level, information advantage proxies based on relationships between EM institutional investors and the headquarters of their parent companies have strong explanatory power for international portfolio allocations. The results remain robust after controlling for other factors like geographic and other measures of economic proximity, economic and capital market development, market integration, market returns and correlation, and corporate governance. The information advantage effect is stronger for EM investors for which external portfolios exhibit a higher degree of concentration. |
| Keywords: | global portfolio allocation, portfolio equity investment, institutional investors, emerging market economies |
| JEL: | G11 G15 F21 |
| Date: | 2015–10 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp9405&r=all |
| By: | Gurnain Pasricha; Matteo Falagiarda; Martin Bijsterbosch; Joshua Aizenman |
| Abstract: | Using a novel data set on capital control actions in 17 emerging-market economies (EMEs) over the period 2001–11, we provide new evidence on domestic and multilateral (or spillover) effects of capital controls. Our results, based on panel vector autoregressions, suggest that capital control actions had limited impact on the variables of the monetary policy trilemma, as a result of offsetting resident flows and ample investment opportunities in EMEs. These findings highlight the importance of the macroeconomic context and of the increasing role of resident flows in understanding the effectiveness of capital inflow management. Tightening of capital inflow restrictions in Brazil, Russia, India, China and South Africa (the BRICS) generated significant spillovers via bank lending and exchange rates, particularly in the post-2008 environment of abundant global liquidity. Spillovers seem to be strongest among the BRICS and in Latin America. These results are robust to various specifications of our models. |
| Keywords: | Econometric and statistical methods, Financial system regulation and policies, International financial markets, International topics, Monetary policy framework |
| JEL: | F32 G15 F41 F42 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:15-37&r=all |
| By: | Toni Ahnert; Enrico Perotti |
| Abstract: | We analyze how a wealth shift to emerging countries may lead to instability in developed countries. Investors exposed to expropriation risk are willing to pay a safety premium to invest in countries with good property rights. Domestic intermediaries compete for such cheap funding by carving out safe claims, which requires demandable debt. While foreign inflows allow countries to expand their domestic credit, risk-intolerant foreign investors withdraw even under minimal uncertainty. We show that more foreign funding causes larger and more frequent runs. Beyond some scale, even risk-tolerant domestic investors are induced to withdraw to avoid dilution. As excess liquidation causes social losses, a domestic planner may seek prudential measures on the scale of foreign inflows. |
| Keywords: | Financial stability; Financial institutions |
| JEL: | F3 G2 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:15-33&r=all |
| By: | James Chapman; H. Evren Damar |
| Abstract: | In this paper, we investigate how liquidity conditions in Canada may affect domestic and/or foreign lending of globally active banks and whether this transmission is influenced by individual bank characteristics. We find that Canadian banks expanded their foreign lending during the recent financial crisis, often through acquisitions of foreign banks. We also find evidence that internal capital markets play a role in the lending activities of globally active Canadian banks during times of heightened liquidity risk. |
| Keywords: | Financial institutions; Financial stability |
| JEL: | E44 F36 G21 G32 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocatr:105&r=all |
| By: | Jung, Kuk Mo |
| Abstract: | Using data on twenty major OECD countries over time, this paper documents a new evidence on real equity and real currency prices: higher real returns in the home equity market relative to foreign counterparts are generally associated with real home currency depreciation at a monthly frequency, but this negative correlation breaks down or even reverses during times of relatively higher aggregate economic uncertainty or volatility. This paper also proposes one plausible explanation for this time-varying correlation structure. The suggested model is based on a long-run risks type model, combined with time-varying liquidity risks in stock markets. With recursive preference for the early resolution of uncertainty and a negative link between the level of short-run economic growth and equity market liquidity volatility, the model demonstrates that severe short-run economic uncertainty overturns the otherwise negative link between the real currency and real relative equity returns. |
| Keywords: | foreign exchange rates, long run risks models, liquidity risks |
| JEL: | E43 F31 G12 G15 |
| Date: | 2015–10 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:67416&r=all |
| By: | Claudio Borio; Piti Disyatat |
| Abstract: | This paper questions the appropriateness of popular analytical frameworks that focus on current accounts or net capital flows as a basis for assessing the pattern of cross-border capital flows, the degree of financial integration and the vulnerability of countries to financial crises. In the process, it revisits the Lucas paradox, the Feldstein-Horioka puzzle and the notion of sudden stops. It argues that, in a world of huge and free capital flows, the centrality of current accounts in international finance, and hence in academic and policy debates, should be reconsidered. |
| Keywords: | capital flows, current account, global imbalances, financial integration, credit, finance, money |
| Date: | 2015–10 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:525&r=all |