We use a new data set on macroprudential foreign exchange (FX) regulations to evaluate their effectiveness and unintended consequences. Our results support the predictions of a model in which banks ...and markets lend in different currencies, but only banks can screen firm productivity. Regulations significantly reduce bank FX borrowing, and firms respond by increasing FX debt issuance. Moreover, regulations reduce bank sensitivity to exchange rates but are less effective at reducing the sensitivity of the broader economy. Therefore, FX regulations mitigate bank vulnerability to currency fluctuations and the global financial cycle, but appear to partially shift the snowbanks of vulnerability elsewhere.
International correlation risk Mueller, Philippe; Stathopoulos, Andreas; Vedolin, Andrea
Journal of financial economics,
11/2017, Letnik:
126, Številka:
2
Journal Article
Recenzirano
Odprti dostop
We show that the cross-sectional dispersion of conditional foreign exchange (FX) correlation is countercyclical and that currencies that perform badly (well) during periods of high dispersion yield ...high (low) average excess returns. We also find a negative cross-sectional association between average FX correlations and average option-implied FX correlation risk premiums. Our findings show that while investors in spot currency markets require a positive risk premium for exposure to high dispersion states, FX option prices are consistent with investors being compensated for the risk of low dispersion states. To address our empirical findings, we propose a no-arbitrage model that features unspanned FX correlation risk.
The currency used in invoicing international trade matters for the impact of exchange rate movements in the presence of price rigidities. We present stylized facts on specific macro, micro and other ...drivers of invoicing based on 45 million Canadian import transactions. Four main results emerge. First, a large share of invoicing takes place in “vehicle” currencies that are neither the exporters nor the importers. Second, we document a novel link between the size of individual transactions and invoicing. Both the absolute value of a transaction and its relative size at the industry level matter. Third, the exchange rate plays an important role along three dimensions: exchange rate volatility, exchange rate regime, and currency transaction volumes in foreign exchange markets. Finally, we confirm the role of the market share of an exporting country at the industry level. Our results identify the most salient patterns in order to guide further developments in theoretical models of invoicing currency choice.
•In theoretical papers variable capital taxes are a tool for managing capital flows.•Empirical work shows we rarely see these variable capital controls in practice.•This variable tax can be ...equivalent to sterilized foreign exchange intervention.•In many countries a variable tax is a reasonable proxy for sterilized intervention.
Recent theoretical papers argue that countries can insulate themselves from volatile world capital flows by using a variable tax on foreign capital as an instrument of monetary policy. But empirical papers argue that we rarely observe these cyclical capital flow taxes used in practice. We construct a small open economy model where the central bank engages in sterilized foreign exchange intervention. When private agents freely trade foreign bonds, sterilized intervention has no effect. But we prove that when frictions prevent the free trade in foreign bonds, optimal sterilized foreign exchange intervention is equivalent to an optimal tax on foreign capital. The model is then calibrated to match the levels of capital account restrictions that we observe in the data. For levels of capital account openness that we observe in many emerging market economies, a variable tax on capital flows is a close approximation for sterilized foreign exchange intervention.
This paper examines the short- and medium run dependence structures between oil and currency markets for MENA, other developing and developed countries, using a novel multiresolution decomposition ...method, namely the variational mode decomposition (VMD), along with a battery of time-invariant and time-varying symmetric and asymmetric copula functions. Further, we assess the downside and upside short- and medium-run risk spillovers from oil to U.S. exchange rate returns and vice versa by computing the conditional Value-at-Risk (CoVaR) risk measures. Before the copula estimations, we apply the spillover index of Diebold and Yilmaz (2012) and network diagrams to identify and select the currencies that are the most significant net contributors or net receivers of returns from/to the oil/currency markets. The copula results show strong evidence of time-varying and high average (tail) dependence between oil returns and the FX markets, which are net transmitters to oil, for the short and medium time horizons. On the other hand, we find average and relatively low dynamic dependence between oil and the net receiver currencies, regardless of the time horizons. Moreover, there is evidence of up and down risk asymmetric systemic risks from oil to currencies and vice versa for some countries in the short-and medium run horizons. Finally, the risk spillovers are asymmetric over time and investment horizons. These results have several important implications for hedging strategies and diversification benefits for oil and FX traders and institutional investors.
•The paper examines systemic risk and dependence structures between oil and 25 currency markets.•We employ the Diebold-Yilmaz index, multiresolution and copula approaches.•We quantify short- and medium-run up and down risk spillovers using the CoVaRs.•We find average and tail dependence between oil and currencies which varies under time horizons.•We provide evidence of higher risk spillovers in the medium- than short-run investment horizons.
Summary
We consider how an investor in the foreign exchange market can exploit predictive information by means of flexible Bayesian inference. Using a variety of vector autoregressive models, the ...investor is able, each period, to learn about important data features. The developed methodology synthesizes a wide array of established approaches for modeling exchange rate dynamics. In a thorough investigation of monthly exchange rate predictability for 10 countries, we find that using the proposed methodology for dynamic asset allocation achieves substantial economic gains out of sample. In particular, we find evidence for sparsity, fast model switching, and exploitation of the exchange rate cross‐section.
Foreign Safe Asset Demand and the Dollar Exchange Rate JIANG, ZHENGYANG; KRISHNAMURTHY, ARVIND; LUSTIG, HANNO
The Journal of finance (New York),
June 2021, 2021-06-00, 20210601, Letnik:
76, Številka:
3
Journal Article
Recenzirano
Odprti dostop
ABSTRACT
We develop a theory that links the U.S. dollar's valuation in FX markets to the convenience yield that foreign investors derive from holding U.S. safe assets. We show that this convenience ...yield can be inferred from the Treasury basis, the yield gap between U.S. government and currency‐hedged foreign government bonds. Consistent with the theory, a widening of the basis coincides with an immediate appreciation and a subsequent depreciation of the dollar. Our results lend empirical support to models that impute a special role to the United States as the world's provider of safe assets and the dollar as the world's reserve currency.
Our paper assesses progress made by the profession in understanding whether and how exchange rate intervention works. We review theory and evidence on official intervention, concentrating primarily ...on work published in the last decade or so. We conclude that, unlike the profession's consensus of the 1980s, official intervention can be effective, especially as a signal of policy intentions and when publicly announced and concerted. We note an apparent empirical puzzle concerning the secrecy of much intervention and suggest another way for intervention to be effective which has received little attention in the literature, namely by remedying a coordination failure in the foreign exchange market.
Though most central banks actively intervene on the foreign exchange market, the literature offers mixed evidence on their effectiveness: particularly for unannounced interventions. We use new, ...declassified data from the archives of the Bank of England and the institutional features of the Bretton Woods Era to estimate the effects of intervention on the exchange rate. We find that a purchase of pounds equivalent to 1% of the money supply causes a statistically significant, 4–5 basis point appreciation in the pound.
This paper offers a novel approach to the estimation of an active component of reserves making use of a time-varying coefficient model estimated with Bayesian techniques. The approach substantially ...extends the time and country coverage of estimates beyond that available under the existing approach. We find that the estimates of an active component for 20 countries over 1995–2017 period are highly correlated with those obtained from the existing approach. The new estimates are cross-checked against the available data on FX market interventions in Argentina, Chile, the Czech Republic, Mexico, Russia and Turkey. We demonstrate that these estimates are a better proxy of FX interventions than simple changes in reserves and are at least as good as the estimates from the existing approach. Our novel approach contributes to a better understanding of changes in FX reserves in many countries, including large reserve holders for which the relevant data are hardly available.
•A novel approach to the estimation of an active component of reserves is developed.•A time-varying coefficient model is estimated with Bayesian techniques.•An active component is obtained for 20 countries over 1995–2017, including China.•The new approach overcomes the scarce data problem plaguing the existing approach.•The estimates are a better proxy of FX interventions than simple changes in reserves.
PDF
