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on International Finance |
| By: | Stefan Avdjiev; John Burger; Bryan Hardy |
| Abstract: | It is well-known that dollar credit to emerging market (EM) corporates has expanded dramatically in the past two decades. However, the concurrent expansion of local currency credit, facilitated by more developed domestic financial systems, has been less recognized. This paper first uses data on EM corporates' borrowing through bonds and syndicated loans to show the considerable rise of their local currency debt. It then utilizes comprehensive firm-level data to document that EM corporates' local currency borrowing can offset shocks to their dollar debt, and how this varies across firms and countries. A broad dollar appreciation is associated with a decline in credit to ''local'' firms (smaller, non-exporting, with low profitability) but has no significant impact on ''global'' firms (larger, exporting, highly profitable). Firms in the mid-range (of these dimensions) see lower dollar debt in response to a stronger dollar, but replace it with local currency debt, thus offsetting the shock. |
| Keywords: | emerging markets, local currency debt, foreign currency debt, global factors, dollar debt |
| JEL: | F30 G30 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1199 |
| By: | Giraldo, Carlos (Latin American Reserve Fund); Giraldo, Iader (Latin American Reserve Fund); Gomez-Gonzalez, Jose E. (City University of New York – Lehman College); Uribe, Jorge M. (Universitat Oberta de Catalunya) |
| Abstract: | This paper investigates the relationship between depreciation and default risks in five key Latin American markets—Brazil, Chile, Colombia, Peru, and Mexico—in response to shifts in the US yield curve slope. Excluding serial defaulters like Argentina, our focus lies on countries still susceptible to the Twin Ds phenomenon amidst high debt levels. We find that global economic spillovers significantly influence the Twin Ds in these markets; with fluctuations in the US term spread serving as an indicator of broader shifts in global economic conditions. Our analysis reveals asymmetric spillover effects, particularly during periods of positive and increasing spreads such as the Global Financial Crisis, where changes in the term spread disproportionately impact the depreciation tail in currency markets and the high-risk tail in sovereign CDS markets. Notably, such effects are absent in stock markets, which accentuate the particular dynamics of currency and sovereign debt markets. The asymmetry of spillover effects, although still present during the most recent Covid-19 crisis, was less pronounced, which may be linked to the accumulation of international FX reserves in the region during the last decades. Our findings emphasize the necessity of incorporating risk spillovers into policy frameworks, highlighting the dominance of risk spillovers over price spillovers and the obscured nature of shocks at the center of the variables’ distribution. |
| Keywords: | Risk spillovers; Price spillovers; US term spread; Twin Ds; Emerging markets |
| JEL: | E43 F34 G01 |
| Date: | 2024–07–22 |
| URL: | https://d.repec.org/n?u=RePEc:col:000566:021169 |
| By: | Craig Burnside; Mario Cerrato; Zhekai Zhang |
| Abstract: | We propose a novel pricing factor for currency returns motivated by the marketmicrostructure literature. Our factor aggregates order flow data to provide a measure of buying and selling pressure related to conventional currency trading strategies. It successfully prices the cross-section of currency returns sorted on the basis of interest rates and momentum. The association between our factor and currency returns differs according to the customer segment of the foreign exchange market. In particular, it appears that financial customers are risk takers in the market, while non-financial customers serve as liquidity providers. |
| Keywords: | exchange rates, market microstructure, order flow, carry trade, currency momentum, crash risk, stochastic discount factor |
| JEL: | F31 G15 |
| Date: | 2023–01 |
| URL: | https://d.repec.org/n?u=RePEc:gla:glaewp:2023_03 |
| By: | Diego Alejandro Martínez Cruz (Banco de la República de Colombia); Philip Rory Symington Alzate (Bloomberg) |
| Abstract: | Foreign portfolio flows constitute a key component of economic activity in small open economies such as Colombia. The dynamics of these flows are subject to the influence of both external (push) factors and domestic (pull) factors. Consequently, economic crises and episodes of financial distress can severely undermine investor confidence, leading to a sharp decline in foreign capital inflows and the subsequent liquidation of local assets, commonly referred to as a sudden stop and sudden start. Such events can have lasting adverse effects on various facets of the economy, including GDP growth, employment rates, financial stability, and investor sentiment. This paper delves into the dynamics of portfolio external investment and which factors can explain them on major Latin American economies and quantifies the potential reduction in foreign investors' holdings of local assets under high external risk scenarios. For the Colombian case, we estimate a potential liquidation of 43.8% of total foreign investors portfolio under the most severe assumed scenario. Our work provides insights to be integrated into various exercises aimed at formulating precautionary policy measures, such as those entailed in the evaluation of adjustments to foreign exchange reserves and other external buffers by the central banks. |
| Keywords: | Foreign Portfolio Flows; Small Open Economies; Economic Crises; Sudden Stop; Sudden Start; Financial Distress; Pull Factors; Push Factors |
| JEL: | F21 F31 F32 F34 G15 G17 E44 |
| Date: | 2024–07–25 |
| URL: | https://d.repec.org/n?u=RePEc:gii:giihei:heidwp15-2024 |
| By: | Christoph E. Boehm; Niklas Kroner |
| Abstract: | Existing high-frequency monetary policy shocks explain surprisingly little variation in stock prices and exchange rates around FOMC announcements. Further, both of these asset classes display heightened volatility relative to non-announcement times. We use a heteroskedasticity-based procedure to estimate a “Fed non-yield shock”, which is orthogonal to yield changes and is identified from excess volatility in the S&P 500 and various dollar exchange rates. A positive non-yield shock raises stock prices in the U.S. and around the globe, and depreciates the dollar against all major currencies. The non-yield shock is essentially uncorrelated with previous monetary policy shocks and its effects are large in comparison. Its strong effects on the VIX and other risk-related measures point towards a dominant risk premium channel. We show that the non-yield shock can be related to Fed communications and that its existence has implications for the identification of structural monetary policy shocks. |
| Keywords: | Federal Reserve; Monetary Policy; Stock Market; Exchange Rates; Asset Prices; Risk Premia; Information Effects; High-frequency Identification |
| JEL: | E43 E44 E52 E58 F31 G10 |
| Date: | 2024–07–18 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgif:1392 |
| By: | Giovanni Donato (Graduate Institute of International and Development Studies); Cedric Tille (Graduate Institute of International and Development Studies, and CEPR) |
| Abstract: | Financial globalization has led to a large increase in international asset holdings. While the rise of associated dividend and interest flows has until now been muted by the decreasing trend in interest rates, this pattern could change, leading to a larger role of investment income flows in the balance of payments. We use a broad sample of countries to document the heterogeneous evolution of the various components of investment income flows, with a rising role of FDI and equity income, especially in advanced economies. We then assess the impact of various variables on yields with a panel analysis. Various drivers have highly heterogeneous effects across investment categories and country groups, often impacting the yields on both assets and liabilities. This translates into substantial heterogeneity in the response of countries’ income balance, due to different compositions of asset and liabilities. This heterogeneity is amplified if we consider country-specific estimates in complement to the panel ones. Focusing on the impact of changes in interest rates, we find that higher rates only had a limited impact in the 2013 taper tantrum, investment income balances are likely to benefit from higher US rates in the current phase of higher rates, with offsetting effects of higher domestic rates. |
| Keywords: | Financial integration; primary investment income flows; interest rates; ex-change rates |
| JEL: | F32 F36 F40 |
| Date: | 2024–07–16 |
| URL: | https://d.repec.org/n?u=RePEc:gii:giihei:heidwp13-2024 |
| By: | Coulier, Lara; Pancaro, Cosimo; Reghezza, Alessio |
| Abstract: | We match granular supervisory and credit register data to assess the implications of banks’ exposure to interest rate risk on the monetary policy transmission to bank lending supply in the euro area. We exploit the largest and swiftest increase in interest rates since the creation of the euro and find that banks with a higher exposure to interest rate risk, i.e., with a larger duration gap after accounting for hedging, curtailed corporate lending more than their peers. Ceteris paribus, greater interest rate risk entails closer supervisory scrutiny and potential capital surcharges in the short term, and lower expected profitability and capital accumulation in the medium to long term. We then proceed to dissect banks’ credit allocation and find that banks with higher net duration reshuffled their loan portfolio away from long-term loans in an attempt to limit the increase in interest rate risk and targetedtheir lending contraction to small and micro firms. Firms exposed to banks with a larger exposure to interest rate risk were unable to fully rebalance their borrowing needs with other lenders, thus experiencing a relatively larger decrease in total borrowing during the monetary tightening episode. JEL Classification: E51, E52, G21 |
| Keywords: | bank lending channel, duration gap, financial stability, interest rate risk |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20242950 |
| By: | Naohisa Hirakata (General Manager, Niigata Branch, Bank of Japan (E-mail: naohisa.hirakata@boj.or.jp)); Mitsuru Katagiri (Associate Professor, Faculty of Business Administration, Hosei University (E-mail: mitsuru.katagiri@hosei.ac.jp)) |
| Abstract: | This paper investigates the role of foreign direct investment (FDI) in accounting for the long-term trend of capital flows under demographic changes. For this purpose, we incorporate horizontal FDI under the proximity-concentration trade-off into a two-country DSGE model and conduct a quantitative analysis using long-term Japanese data for capital flows since the 1960s. The quantitative analysis finds that the transition dynamics solely driven by demographic changes well account for the long-term trend of capital flows and that multinational firms' endogenous decision on FDI in response to population aging is key to explaining the long-term trend. |
| Keywords: | Capital flows, Demographic changes, Foreign direct investment (FDI) |
| JEL: | F12 F23 F32 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:ime:imedps:24-e-05 |
| By: | Jabir Sandhu; Rishi Vala |
| Abstract: | We find that on any given day, nearly half of Government of Canada bond transactions by clients of dealers can be offset with other clients, including during the turmoil in March 2020. Our results show that under certain conditions clients could potentially trade directly with each other and are a step towards understanding the relevance of broader all-to-all trading in the Government of Canada bond market. |
| Keywords: | Coronavirus disease (COVID-19); Financial institutions; Financial markets; Financial stability; Market structure and pricing |
| JEL: | D4 D47 D5 D53 G0 G01 G1 G12 G13 G14 G2 G21 G23 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocsan:24-17 |
| By: | Dutta, Sourish (Vivekananda Institute of Professional Studies-Technical Campus) |
| Abstract: | This article underscores the immense potential for substantial economic growth and development that can be harnessed through effective participation in global value chains (GVCs). It emphasises the role of policymakers in adeptly navigating GVCs, prioritising tasks, exploring different forms of GVC governance, and fostering a conducive environment for foreign investments. By effectively managing power dynamics and supply chain risks, countries can attract valuable foreign investors, enhance market connectivity, and improve infrastructure and services, leading to significant economic growth. The potential benefits of GVC participation are vast, and policymakers can shape the situation by understanding and addressing strategic inquiries, laying the foundation for a prosperous future. Furthermore, the article explores the potential for a country to enhance its involvement in GVCs and progress to more lucrative activities by strengthening existing connections between GVCs and the local economy. By enhancing the capacity of local stakeholders to acquire knowledge, policymakers can play a crucial role in maximising the benefits from GVC spillovers, positively impacting a country's economic development. |
| Date: | 2024–06–16 |
| URL: | https://d.repec.org/n?u=RePEc:osf:socarx:2gvkc |
| By: | Emmanuel C Mamatzakis |
| Abstract: | This study examines the factors underlying the notably high Greek bank net interest margins compared to the euro-area average, with a particular focus on the interplay between bank competition and recapitalisations. Employing dynamic panel analysis from the early 2000s to 2021, we address potential endogeneity concerns and heterogeneity considerations. Additionally, we utilise local projections impulse response functions to account for structural shifts within the Greek banking landscape. Our findings reveal that diminished bank competition has played a significant role in driving up net interest margins in Greece. Intriguingly, the impact of Greek recapitalisations, in parallel with market conditions characterised by a low level of bank competition, has further contributed to high net interest margins. Supported by evidence from local projections impulse response functions, our study emphasises the necessity of accelerating the banking union and implementing a common regulatory framework across the euro-area. Setting caps on bank interest margins and fees could be a sensible practical recommendation. Such measures are crucial for fostering a more competitive banking environment and mitigating the persistently high net interest margins observed in the Greek banking industry. |
| Keywords: | Bank Competition, Recapitalisations, Net Interest Rate Margin, Dynamic Panel Analysis, Local Projections |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:hel:greese:199 |
| By: | Kjell G. Nyborg (University of Zurich - Department of Banking and Finance; Centre for Economic Policy Research (CEPR); Swiss Finance Institute) |
| Abstract: | Repo rates frequently exceed unsecured interbank rates. This apparent anomaly occurs under different institutional structures, currencies, and tenors, often over prolonged periods. I develop a theory of liquidity sourcing and provisioning under constraints that results in a trilateral linkage between unsecured and repo rates and the rate of return of the underlying collateral in the cash market. The model incorporates what differentiates repos from plain collateralized loans, namely, that cash providers get the collateral for the duration of the contract. The collateral spread (unsecured minus repo) emerges as a measure of stress. Negative spreads are symptoms of highly stressed markets. |
| Keywords: | liquidity, repo, collateral spread, trilateral linkage, liquidity premium, general collateral, financial stress |
| JEL: | G12 G13 G21 E43 E58 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:chf:rpseri:rp2437 |