Insolvency regimes and firms' default risk under economic uncertainty and shocks

One of the arguments often advanced for implementing a stronger insolvency and bankruptcy framework is that it enhances credit discipline among firms. Using a large cross-country firm-level dataset, we empirically test whether a stronger insolvency regime reduces firms' likelihood of defaulting on their debt. In particular, we examine whether it reduces default risk during increased economic uncertainty and various external shocks. Our results confirm that a stronger insolvency regime moderates the adverse effects of economic shocks on firms' default risk. The effects are more pronounced for firms in the top half of the size distribution. We also explore channels through which improved creditor rights influence firms' default risk, including dependence on external finance, corporate leverage, and managerial ethics. Our main results are robust to an alternative measure of default risk, inclusion of currency and sovereign debt crisis episodes, and alternative estimations.     

Political booms and currency crises

This paper shows evidence that political booms, defined as the rise in governments’ popularity, are associated with a higher likelihood of currency crises. The reasoning behind this finding is that prudent economic policies to address underlying weaknesses in the economy may be political costly for incumbent governments in the short-term. Hence, popularity-concerned governments may not have enough incentives to take such corrective actions in a timely manner. This approach, in turn, can deteriorate economic fundamentals and increase related risks in the economy which can eventually lead to crises. This paper sheds light on this phenomenon in the case of currency crises, suggesting that currency crises can be viewed as “political booms gone bust” events. Moreover, it finds that higher international reserves, higher exports, and a higher degree of financial openness alleviate the effect of political booms on currency crises.     

Dynamic risk spillovers and portfolio risk management between precious metals and global foreign exchange markets

This study examines portfolio management and risk spillovers between four major precious metals (gold, silver, palladium and platinum) and 20 important U.S. exchange markets. To this end, we employ the multivariate DECO-GARCH model and the spillover index developed by Diebold and Yilmaz (2014, 2016) to examine the spillovers between those metal prices and the exchange rates and design portfolios and hedging strategies using different risk measures. The results show evidence of weak average conditional equicorrelations among the considered markets over time, excluding the turbulent 2008–2010 period. Furthermore, the precious metals (excluding platinum) and the currencies (with the exception of the Australian, Brazilian, Denmark, Euro, Mexican, Norwegian, New Zealand and Swedish currencies) are net receivers of shocks. Finally, the four precious metals provide strong risk and downside risk reductions, underscoring the usefulness of including precious metals in a traditional foreign exchange-dominated portfolio.     

On the predictability of the distribution of excess returns in currency markets

This paper investigates the predictability of foreign exchange (FX) volatility and liquidity risk factors on returns to the carry trade, an investment strategy that borrows in currencies with low interest rates and invests in currencies with high interest rates. Previous studies have suggested that this predictability could have been spuriously accounted for due to the persistence of the predictors. The analysis uses a predictive quantile regression model developed by Lee (2016) that allows for persistent predictors. We find that predictability changes remarkably across the entire distribution of currency excess returns. Predictability weakens substantially in the left tail once persistence is accounted for, implying a moderate negative predictive relation between FX volatility risk and carry trade returns. By contrast, it becomes stronger in the right tail. Furthermore, we provide evidence that FX volatility risk still dominates liquidity risk after controlling for persistence. These findings suggest that the persistence of the predictors needs to be taken into account when one measures predictability in currency markets. Finally, out-of-sample forecast performance is also presented.     

Do currency undervaluations affect the impact of inflation on growth?

In this paper, we investigate how the level of currency undervaluations affects the effect of inflation on growth in a sample of 62 countries over the 1980–2015 period. While previous studies find a positive effect of an undervalued currency, we show that higher currency undervaluations reinforce the contractionary effect of inflation on growth. As an undervalued currency is associated with supplementary inflation pressures arising from a cost-push inflation phenomenon and economy overheating, growth is thus penalized. This result is shown to be robust to the exclusion of currency crises episodes from our sample, and dependent of the development level of countries. Specifically, it holds in the case of emerging countries, but not for developing economies. Consequently, policies based on undervaluations should not be encouraged for emerging economies as they tend to reinforce the contractionary effect of inflation on growth.     

东亚区域货币联盟实践、前景与对策

东亚区域货币联盟得到大多数理论研究的支持,各国政府也表现出较大的兴趣,东盟10+3货币互换安排和亚洲债券基金是东亚货币金融合作的两个标志性事件。在可预见的将来,东亚有可能出现某种松散的货币联盟,以流动性提供机制为核心、建立相对灵活的汇率稳定机制、以其他经济领域一体化为基础、保持“亚洲传统”的特色,是东亚货币联盟的四大特点。中国应该采取积极、灵活的政策,在全面经济金融合作的基础上支持区域货币联盟,并在其中发挥应有的作用。     

Currency substitution,risk premia and the Taylor principle

This paper studies the equilibrium determinacy properties of a simple interest rate rule in a small open economy subject to currency substitution (i.e., the use of a foreign currency for domestic transactions) and risk premia on foreign borrowing. It shows that if currencies are substitute in the provision of liquidity services the rule׳s response to inflation has to be sufficiently above unity for the equilibrium to be locally determinate. This reinforced Taylor principle requirement appears to be more binding in economies characterized by a larger elasticity of currency substitution, more debt-elastic country risk premia, and intermediate degrees of dollarization in transactions.     

The International Politics of Reactive Currency Statecraft: Japan’s Reaction to the Rise of the Chinese Renminbi

This study analyses how a state’s reactive currency statecraft – its strategic reaction to an international currency issued by a foreign state – is shaped, by devoting special attention to its broad foreign policy stance towards the state issuing that international currency, with a main empirical focus on the Japanese case with regard to the Chinese renminbi. This research argues that a state uses its policy related to a foreign international currency as a diplomatic means of managing its political relationship with the state issuing that currency, while also showing that in general most market actors are not greatly interested in their governments’ policies regarding foreign international currencies, especially those that are newly internationalising ones. This study finds as well that the conventional notion of ‘competition’ between international currencies does not necessarily affect a state’s reactive currency statecraft, even if its own currency is a major international one. All of this suggests that the inter-state politics between the state issuing an international currency and foreign states does have a crucial impact on the currency’s international use, especially during its early stages of internationalisation. It also implies that a state’s reactive currency statecraft can be fluid, depending upon the directions of its foreign policy.     

Carry trade strategies based on option-implied information: Evidence from a cross-section of funding currencies

We document carry trade returns based on the moments extracted from options on the underlying currencies. We establish three important results. First, a currency pair is predicted to have greater excess returns if option-implied returns are more volatile, are more left-skewed, and have fatter tails than the returns of other currency pairs. Second, strategies based on option-implied information improve on benchmark strategies based on realized market returns and macroeconomic data. Third, if the option-implied returns of a currency pair are more left-skewed than in the past, anti-carry trades rather than carry trades perform better.     

How important is fiscal policy cooperation in a currency union?

By constructing a dynamic stochastic general equilibrium model, which assumes a currency union consisting of two countries with nontradables, we study the importance of fiscal policy cooperation. As shown in the previous studies, we find that the role of fiscal policy is important in maximizing social welfare. However, we have a contrary result for fiscal policy cooperation. While the previous studies highlight that fiscal policy cooperation has a nontrivial effect in maximizing social welfare, we show that fiscal policy cooperation has no benefits, regardless of the share of nontradables. Self-oriented fiscal policy can replicate social welfare under the cooperative setting.