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Jel Classification:G15 

Working Paper
International financial integration and crisis contagion

International financial integration helps to diversify risk but also may increase the transmission of crises across countries. We provide a quantitative analysis of this trade-off in a two-country general equilibrium model with endogenous portfolio choice and collateral constraints. Collateral constraints bind occasionally, depending upon the state of the economy and levels of inherited debt. The analysis allows for different degrees of financial integration, moving from financial autarky to bond market integration and equity market integration. Financial integration leads to a significant ...
Globalization Institute Working Papers , Paper 197

Working Paper
Production and Inventory Dynamics under Ambiguity Aversion

We propose a production-cost smoothing model with Knightian uncertainty due to ambiguity aversion to study the joint behavior of production, inventories, and sales. Our model can explain four facts that previous studies find difficult to account for simultaneously: (i) the high volatility of production relative to sales, (ii) the low ratio of inventory-investment volatility to sales volatility, (iii) the positive correlation between sales and inventories, and (iv) the negative correlation between the inventory-to-sales ratio and sales. We find that the stock-out avoidance motive (Kahn 1987) ...
Research Working Paper , Paper RWP 21-05

Working Paper
Portfolio Rebalancing in Times of Stress

This paper investigates time variation in the dynamics of international portfolio equity flows. We extend the empirical model of Hau and Rey (2004) by embedding a two-state Markov regime-switching model into the structural VAR. The model is estimated using monthly data, 1995-2015, on equity returns, exchange rate returns and equity flows between the United States and advanced and emerging economies. We find that the data are consistent with portfolio rebalancing. The estimated states match periods of low and high financial stress. Our main result is that for equity flows between the United ...
Globalization Institute Working Papers , Paper 322

Working Paper
Credit Migration and Covered Interest Rate Parity

This paper examines the connection between deviations in covered interest rate parity and differences in the credit spread of bonds of similar risk but different currency denomination. These two pricing anomalies are highly aligned in both the time series and the cross-section of currencies. The composite of these two pricing deviations ? the corporate basis ? represents the currency-hedged borrowing cost difference between currency regions and explains up to a third of the variation in the aggregate corporate debt issuance flow. I show that arbitrage aimed at exploiting one type of security ...
International Finance Discussion Papers , Paper 1255

Working Paper
Is the Renminbi a safe haven?

We investigate the relationship between market uncertainty and the relative value of the Renminbi against currencies that the safe haven literature typically considers as the traditional safe haven currency candidates. Our sample spans the February 2011 to April 2016 period. Band spectral regression models enable us to capture that the relationship between market uncertainty and the relative value of the Renminbi is frequency dependent. While we find evidence of some degree of safe haven currency behavior of the Renminbi during the early part of our sample, our findings do not support the ...
Globalization Institute Working Papers , Paper 276

Report
Arbitrage-free affine models of the forward price of foreign currency

Forward foreign exchange contracts embed not only expected depreciation but also a sizable premium, which complicates inferences about anticipated returns. This study derives arbitrage-free affine forward currency models (AFCMs) with closed-form expressions for both unobservable variables. Model calibration to forward term structures of eleven U.S.-dollar currency pairs from the mid-to-late 1990s through early 2014 fits the data closely and suggests that the premium is indeed nonzero and variable, but not to the degree implied by previous econometric studies.
Staff Reports , Paper 665

Working Paper
A sentiment-based explanation of the forward premium puzzle

This paper presents a sentiment-based explanation of the forward premium puzzle. Agents over- or underestimate the growth rate of the economy. All else equal, when perceived domestic growth is higher than perceived foreign growth, the domestic interest rate is higher than the foreign interest rate. At the same time, an econometrician would expect an increase in the home currency value. Together, the model with investor misperception can account for the forward premium puzzle.> ; In addition, it helps explain the low correlation of consumption growth differentials and exchange rate growth and ...
Globalization Institute Working Papers , Paper 90

Working Paper
US Equity Tail Risk and Currency Risk Premia

We find that a US equity tail risk factor constructed from out-of-the-money S&P 500 put option prices explains the cross-sectional variation of currency excess returns. Currencies highly exposed to this factor offer a low currency risk premium because they appreciate when US tail risk increases. In a reduced-form model, we show that country-specific tail risk factors are priced in the cross section of currency returns only if they contain a global risk component. Motivated by the intuition from the model and by our empirical results, we construct a novel proxy for a global tail risk factor by ...
International Finance Discussion Papers , Paper 1253

Working Paper
Policy Rules and Large Crises in Emerging Markets

Emerging countries have increasingly adopted rules to discipline government policy. The COVID-19 shock led to widespread suspension and modification of these rules. We study rules and flexibility in a sovereign default model with domestic fiscal and monetary policies and long-term external debt. We find welfare gains from adopting monetary targets and debt limits during normal times. Though government policy cannot itself counteract fundamental shocks hitting the economy, the adoption of rules has a significant impact on policy, macroeconomic outcomes and welfare during large, unexpected ...
Working Papers , Paper 2022-018

Working Paper
International Stock Comovements with Endogenous Clusters

We examine international stock return comovements of country-industry portfolios. Our model allows comovements to be driven by a global and a cluster component, with the cluster membership endogenously determined. Results indicate that country-industry portfolios tend to cluster mainly within geographical areas that can include one or more countries. The cluster compositions substantially changed over time, with the emergence of clusters among European countries from the early 2000s. The cluster component was the main driver of country-industry portfolio returns for most of the sample, except ...
Working Papers , Paper 2018-038

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Sanchez, Juan M. 23 items

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