An Empirical Examination of the Ex Ante International Interest Rate Transmission

Using U.S. Treasury bill and Eurodollar futures to proxy for domestic and external interest rates, respectively, this study examines ex ante interest rate transmission across markets for the period 1982-1991. The results indicate that these interest rates are cointegrated and that they Granger-cause each other, implying that both domestic and offshore interest rates move together and that both markets are integrated. Interest rate transmission is found to be more rapid in recent years, a result supporting the idea that the international financial markets are becoming more integrated.     

International transmission of information: evidence from the Euroyen and Eurodollar futures markets

This paper examines the information transmission between Japan and the US by using the Tokyo Euroyen and Chicago Eurodollar futures. These two interest rate futures markets provide a better understanding of international information transmission than stock markets, which have been shown to exhibit nonsynchronous trading and market segmentation. The results show that traders in Tokyo (Chicago) use information that is revealed overnight in Chicago (Tokyo). The bivariate EGARCH-t model provides no evidence of volatility spillovers in either direction, suggesting that the opening price rapidly reflects foreign information. The overall results support the hypothesis that the domestic market efficiently adjusts to foreign news. The results are also broadly consistent with the covered interest arbitrage effects.     

External currency market data: An application from BIS series

The Bank for International Settlements, in its Annual Report, has provided the most-used data source for statistical work by international financial researchers concerned with the Eurodollar market and with other external currency markets. Unfortunately, the often-confusing and complicated published series have been used indiscriminately. This paper develops an approach for identifying foreign private non-bank ownership of US dollars held in offshore markets. Explicit consideration of the types and strength of assumptions necessary makes evident the care that should be exercised in the use and interpretation of the various BIS data series.     

Demand for money in open economies

The demand for real cash balances deduced from an underlying portfolio model of the financial market is shown to depend upon domestic variables and foreign monetary developments. The model is estimated using quarterly postwar data for Canada, Germany, UK and US. There is clear evidence that demand for money is affected not only by changes in domestic variables such as permanent income, domestic interest rate and price expectations but also by fluctuations in exchange rate expectations and foreign interest rates. The conclusion, that domestic monetary policy is fairly ineffective and domestic financial markets are highly vulnerable to changes in foreign financial and monetary developments need to be modified in light of the results presented in this paper.     

Linkages between Indian and US financial markets: impact of global financial crisis and Eurozone debt crisis

This paper examines inter-linkages between Indian and US equity, foreign exchange and money markets using the vector autoregressive-multivariate GARCH-BEKK framework. We investigate the impact of global financial crisis (GFC) and Eurozone debt crisis (EZDC) on the conditional volatility and conditional correlation estimates derived from the multivariate GARCH model for Indian and US financial markets. Our results indicate that there is significant bidirectional causality-in-mean between the Indian stock market returns and the Rs./USD market returns, and significant unidirectional causality-in-mean from the US stock market returns to the Indian stock market returns. As regards volatility spillovers, we find that volatility in the Indian stock market rises in response to domestic as well as US financial market shocks but Indian financial market shocks do not impact the US markets. Further, impact of the recent crisis episodes on the covariance matrix is found to be significant. We find that volatility in the Indian and US financial markets significantly amplified during GFC. The conditional correlations across asset markets were significantly accentuated in the wake of the two crisis episodes. The impact of GFC on cross-market conditional correlations is higher for majority of the asset market pairs in comparison to the EZDC.     

Domestic or global imbalances? Rising income risk and the fall in the US current account

When default leads to exclusion from financial markets, the implied loss of consumption smoothing opportunities is more costly when income volatility is high. A rise in income risk thus makes default less attractive, allowing creditors to relax borrowing limits. I show how, in an open economy, this endogenous financial deepening may reduce aggregate foreign assets in response to a rise in individual income risk, against the precautionary savings intuition. Conditions for this depend on whether default constrains complete or uncontingent contracts. The post-1980 rise in US household income risk strongly reduces foreign assets when domestic markets are complete or world interest rates low.     

Scheduled domestic and US macroeconomic news and stock valuation in Europe

This paper investigates whether investors on European stock markets regard news announcements about domestic and US macroeconomic variables as an important source of information when valuing stocks. To assess the importance of scheduled domestic and US macroeconomic news announcements, implied volatilities are analyzed on the German and Finnish stock markets. The results show that the US employment report and the Federal Open Market Committee (FOMC) meeting days have a significant impact on implied volatility on both European markets. The domestic news announcements have no effect on implied volatility on either of the markets. The results indicate that the US macroeconomic news announcements are valuable sources of information on European stock markets while domestic news releases seem to be unimportant.     

Global Trade – Hostage to the Volatile US Dollar

Brian Kantor says that every financial manager ought to have a multi‐decade historical perspective on foreign exchange rates to appreciate how quickly and dramatically rates can change. Managers should understand how domestic politics influences central bank policies and, ultimately, foreign exchange rates, even if unintentionally. Longer‐term historical perspectives are a necessary part of a solid decision‐making foundation. He provides a summary foreign exchange history from the perspective of the South African Rand (ZAR) and the US dollar (USD). What is most remarkable about such exchange rates, perhaps, is not just the variation around established trends but the tendency of apparently well‐established trends to reverse completely. Kantor explains that, since 1970, the global economy has had to cope with flexible exchange rates that do not necessarily trend to Purchasing Power Parity “equilibrium.” This is a highly unsatisfactory feature of the global financial and trading system. The chance of a reintroduction of genuinely fixed exchange rates seems very small, however. Business decision‐makers will have to cope as best they can with unpredictable real exchange rates.     

Granger-causality in quantiles between financial markets: Using copula approach

This paper considers the Granger-causality in conditional quantile and examines the potential of improving conditional quantile forecasting by accounting for such a causal relationship between financial markets. We consider Granger-causality in distributions by testing whether the copula function of a pair of two financial markets is the independent copula. Among returns on stock markets in the US, Japan and U.K., we find significant Granger-causality in distribution. For a pair of the financial markets where the dependent (conditional) copula is found, we invert the conditional copula to obtain the conditional quantiles. Dependence between returns of two financial markets is modeled using a parametric copula. Different copula functions are compared to test for Granger-causality in distribution and in quantiles. We find significant Granger-causality in the different quantiles of the conditional distributions between foreign stock markets and the US stock market. Granger-causality from foreign stock markets to the US stock market is more significant from UK than from Japan, while causality from the US stock market to UK and Japan stock markets is almost equally significant.     

Can negative interest rates really affect option pricing? Empirical evidence from an explicitly solvable stochastic volatility model

The profound financial crisis generated by the collapse of Lehman Brothers and the European sovereign debt crisis in 2011 have caused negative values of government bond yields both in the USA and in the EURO area. This paper investigates whether the use of models which allow for negative interest rates can improve option pricing and implied volatility forecasting. This is done with special attention to foreign exchange and index options. To this end, we carried out an empirical analysis on the prices of call and put options on the US S&P 500 index and Eurodollar futures using a generalization of the Heston model in the stochastic interest rate framework. Specifically, the dynamics of the option’s underlying asset is described by two factors: a stochastic variance and a stochastic interest rate. The volatility is not allowed to be negative, but the interest rate is. Explicit formulas for the transition probability density function and moments are derived. These formulas are used to estimate the model parameters efficiently. Three empirical analyses are illustrated. The first two show that the use of models which allow for negative interest rates can efficiently reproduce implied volatility and forecast option prices (i.e. S&P index and foreign exchange options). The last studies how the US three-month government bond yield affects the US S&P 500 index.     

金融市场开放背景下境内外币市场的变化与挑

长期以来,境内外币市场流动性更多受到境内企业外币存贷款需求变化的影响,关注其变化就能对流动性做出较好预判。但随着我国金融市场的开放程度不断提升,资本及金融市场项目的进出逐渐成为了决定境内外币流动性状况的主要因素,境内外市场利差不断缩小,对于全球货币市场流动性及境内资产的对外吸引力研究已成为境内外币流动性管理者不得不重视的课题。     

Determinants of global spillovers from US monetary policy

This paper assesses the global spillovers from identified US monetary policy shocks in a global VAR model. US monetary policy generates sizable output spillovers to the rest of the world, which are larger than the domestic effects in the US for many economies. The magnitude of spillovers depends on the receiving country's trade and financial integration, de jure financial openness, exchange rate regime, financial market development, labour market rigidities, industry structure, and participation in global value chains. The role of these country characteristics for the spillovers often differs across advanced and non-advanced economies and also involves non-linearities. Furthermore, economies that experience larger spillovers from conventional US monetary policy also displayed larger downward revisions of their growth forecasts in spring 2013 when the Federal Reserve upset markets by discussing tapering off quantitative easing. The results of this paper suggest that policymakers could mitigate their economies' vulnerability to US monetary policy by fostering trade integration as well as domestic financial market development, increasing the flexibility of exchange rates, and reducing frictions in labour markets. Other policies – such as inhibiting financial integration, industrialisation and participation in global value chains – might mitigate spillovers from US monetary policy, but are likely to reduce long-run growth.     

Financial crisis and a transmission mechanism of external shocks: The signaling role of the Korean Monetary Stabilization Bond

This paper explores a transmission mechanism of an exogenous shock to domestic financial markets by investigating the potential signaling role of the Monetary Stabilization Bond (MSB) spread together with several financial variables in Korea. The MSB spread widened and became more volatile during the crisis period after the variance change point at the end of 2007, when the causality relationships between the key variables became apparent. The empirical results illustrate that a foreign shock, which directly leads to rapid short-term capital flow and foreign exchange rate fluctuation, is likely to have a significant contagion effect on domestic financial markets in the case where it has a sizable negative impact on national foreign reserve holdings. The MSB is a monetary policy instrument for foreign exchange reserve management, and the daily observable MSB spread is a timelier signal in this transmission channel.     

Evaluating capital mobility in the EU: a new approach using swaps data

The level of capital mobility prevailing within a group of core European Union (EU) countries is evaluated by means of cointegration-based tests of the covered interest parity (CIP). Unlike previous studies, this one concentrates on long maturities, investigating three to ten-year assets, and employing swap rates as a means of covering foreign exchange risk. Although CIP has not been previously assessed for EU long-term interest rates, such evaluation has practical interest. In fact, given EU member states' scarcity of mechanisms to react to asymmetric shocks, financial markets may become one major source of adjustment and stabilization. To this end, it is the mobility of long-term capital that is of critical importance. The analysis in this paper suggests that long-term financial flows appear to be completely unrestrained only between domestic Dutch and German markets.     

THE ASIAN CRISIS: LESSONS FOR CRISIS MANAGEMENT AND PREVENTION

The succession of financial crises that swept through Asia, Russia, and Latin America in 1997 and 1998 has led to considerable debate about both the role of the IMF and possible actions to limit further crises. Some have argued that international financial markets do not function well and are subject to periodic contagious panics that can be stemmed by an international lender of last resort. This paper argues that the IMF has neither the resources nor the superior information to play such a role. However, there may be a need for an international financial institution that can use its leverage to secure policy changes in the affected countries.
The paper also takes issue with the view that the IMF is simply bailing out imprudent international banks and that measures are needed to "bail them back in" again. The source of the Asian crisis lay in the real economy, but the effect of the crisis was greatly exacerbated by the financial structure of the affected countries. In particular, much of the risk was borne by domestic banks that borrowed dollars in the short-term interbank market and made longerterm loans in the local currency. Public policy needs to be directed to ensuring that the risks in emerging markets are distributed efficiently across both foreign and domestic investors. That involves greater use of equity finance and structured debt, as well as possibly a more direct role for foreign banks in funding local activities.     

Equity market liberalization and corporate governance

Equity market liberalizations open up domestic stock markets to foreign investors. A puzzle in the literature is why developing countries exhibit relatively small financial impacts associated with liberalizations. We use cross-firm variation in corporate governance at the time of the official liberalization of the equity market in Korea to test whether governance can explain the extent to which firms benefit when countries liberalize. The results show that better-governed firms experience significantly greater stock price increases upon equity market liberalization. Following the liberalization in Korea, foreign ownership in firms with strong corporate governance was significantly higher than that in firms with weak governance. Better-governed firms also exhibit higher rates of physical capital accumulation after liberalization.     

The increasing default risk of US Treasury securities due to the financial crisis

This paper examines the impact of the current financial crisis on long-term US Treasury yields by testing the impact of a series of events from December 2007 to March 2009 on the spread between 10-year USD LIBOR swap and 10-year US Treasury (constant maturity) rates to measure risk associated with Treasuries. Controlling for the liquidity of the two markets, the default risk of the swap, and the net foreign purchases of Treasury securities, we find that 13 of the tested 20 events have significantly negative coefficients. We conclude that the lower spread is consistent with greater default risk for US Treasury securities.     

The Volatility of Return Revisions and Financial Statement Literacy in Emerging Markets: The Case of Cross‐listed Chinese Firms

Are foreign investors in emerging markets more financial statement literate than domestic investors? If so, this conjecture implies that foreign (domestic) investors are more likely to revise their return expectations to cash flow (discount rate) news. It also implies that cash flow news and discount rate news are likely to be uncorrelated when evaluating return revisions by domestic investors, whereas cash flow news and discount rate news are likely to be negatively correlated when evaluating return revisions by foreign investors. The Chinese equity markets yield robust empirical results that are consistent with both hypotheses.     

Excessive Dollar Debt: Financial Development and Underinsurance

We propose that the limited financial development of emerging markets is a significant factor behind the large share of dollar-denominated external debt present in these markets. We show that when financial constraints affect borrowing and lending between domestic agents, agents undervalue insuring against an exchange rate depreciation. Since more of this insurance is present when external debt is denominated in domestic currency rather than in dollars, this result implies that domestic agents choose excessive dollar debt. We also show that limited financial development reduces the incentives for foreign lenders to enter emerging markets. The retarded entry reinforces the underinsurance problem.     

Investor yield and gross underwriting spread comparisons among U.S. dollar domestic,Yankee, Eurodollar,and global bonds

The characteristics and features of domestic, foreign, Eurobonds, and global bonds differ from one another, as do their regulation. We develop regression models to compare investor yield differences that should logically exist at issuance for these bond market segments for U.S. dollar denominated bonds. Our empirical results show that, ceteris paribus, both privately placed and Rule 144A Eurodollar issues yield more than publicly placed bonds; Yankee bonds yield insignificantly more than domestic bonds; and, the bearer feature common to Eurodollar bonds is not prized enough by institutional investors for them to accept a lower yield relative to domestic or Yankee bonds. We do not find a statistically significant difference between the investor yield spread on U.S. dollar global bonds and U.S. domestic bonds, or Yankee bonds, or Eurodollar bonds. We also study underwriting costs of publicly traded bonds and find, ceteris paribus, that Eurodollar bonds are far more costly for the firm to issue than domestic bonds, Yankee bonds, or global bonds; domestic and Yankee bonds are more expensive than global bonds; and, there is no significant cost difference between domestic and Yankee bonds.