Conference Agenda

Session
AP 06: International Finance
Time:
Thursday, 17/Aug/2023:
10:30am - 12:00pm

Session Chair: Thomas Maurer, The University of Hong Kong
Location: 1A-33 (floor 1)


Presentations
ID: 2081

Capital Flows and the Real Effects of Corporate Rollover Risk

Leonardo Elias

Federal Reserve Bank of New York, United States of America

Discussant: Xiang Fang (University of Hong Kong)

What are the real costs of reversals in international capital flows? In this paper, I exploit plausibly exogenous variation in firms’ exposure to rollover risk to identify a causal liquidity channel at play during sudden stop episodes. Using a panel of firms across 39 countries, I show that firms with higher exposure (as measured by the share of long-term debt maturing over the next year) reduce investment ten percentage points more than non-exposed firms following sudden stops in capital flows. The impact is persistent: exposed firms experience lower investment, lower employment and lower assets than non-exposed firms even three years after the initial shock. In robustness tests, I show that the results are specific to sudden stop episodes in that they do not hold in periods without sudden stops, and they hold across sudden stop episodes regardless of whether the sudden stop takes place during large economic contractions.

EFA2023_2081_AP 06_1_Capital Flows and the Real Effects of Corporate Rollover Risk.pdf


ID: 1781

Corporate Basis and Demand for U.S. Dollar Assets

Grace Xing Hu1, Zhan Shi1, Ganesh Viswanath-Natraj2, Junxuan Wang2

1Tsinghua University, China, People's Republic of; 2University of Warwick

Discussant: Harald Hau (University of Geneva)

The corporate basis measures the price differences between bonds issued in dollars and foreign currencies by the same corporate entity. In this paper, we propose a novel method to decompose the corporate basis into three components: credit spread differential, convenience yield differential, and deviation from covered interest rate parity. With this decomposition, we document several stylized facts, and in particular, the substitution effect between safe and risky dollar assets. We provide further evidences on the substitution effect using the structural VAR analysis, which shows that a negative shock to financial intermediaries' balance sheets causes a tightening of credit spread differential, a demand shift toward safe assets, and an appreciation of the dollar. We also find consistent holdings-level evidences using foreign investors' aggregated holdings of safe and risky dollar assets. Lastly, we find spillover effects to the equity and commodity markets, as well as to the domestic and international economic activities. Our results highlight the important role of the dollar, which are further amplified by financial intermediaries, in the global financial markets.

EFA2023_1781_AP 06_2_Corporate Basis and Demand for US Dollar Assets.pdf


ID: 1395

Subjective Risk Premia in Bond and FX Markets

Paul Whelan1, Ilaria Piatti2, Daniel Pesch3

1Copenhagen Business School; 2Queen Mary University of London; 3Oxford Said Business School

Discussant: Pasquale Della Corte (Imperial College London)

This paper elicits subjective risk premia from an international survey dataset on interest rates and exchange rates. Survey implied risk premia are (i) unconditionally negative for bonds, positive for investment currencies and negative for funding currencies, (ii) correlated with (subjective) macro expectations, (iii) correlated with quantities of risk, (iv) mean-reverting, as opposed to extrapolative; and (v) predict future realised returns with a positive sign. Taking beliefs as given, we estimate a subjective asset pricing model with time-variation in economic uncertainty which supports these findings. This demonstrates that subjective risk premia respect a risk-return trade-off regardless of whether they are rational or not, suggesting that behavioural theories of belief formation can co-exist with rational theories of risk pricing.

EFA2023_1395_AP 06_3_Subjective Risk Premia in Bond and FX Markets.pdf