International Spillovers and Local Credit Cycles

This paper studies the transmission of the Global Financial Cycle (GFC) to domestic credit market conditions in a large emerging market, Turkey, over 2003–13. We use administrative data covering the universe of corporate credit transactions matched to bank balance sheets to document four facts: (1) an easing in global financial conditions leads to lower borrowing costs and an increase in local lending; (2) domestic banks more exposed to international capital markets transmit the GFC locally; (3) the fall in local currency borrowing costs is larger than foreign currency borrowing costs due to the comovement of the uncovered interest rate parity (UIP) premium with the GFC over time; (4) data on posted collateral for new loan issuances show that collateral constraints do not relax during the boom phase of the GFC.

Trading Macro-Cycles of Foreign Exchange Markets Using Hybrid Models

Most existing studies on forecasting exchange rates focus on predicting next-period returns. In contrast, this study takes the novel approach of forecasting and trading the longer-term trends (macro-cycles) of exchange rates. It proposes a unique hybrid forecast model consisting of linear regression, multilayer neural network, and combination models embedded with technical trading rules and economic fundamentals to predict the macro-cycles of the selected currencies and investigate the predicative power and market timing ability of the model. The results confirm that the combination model has a significant predictive power and market timing ability, and outperforms the benchmark models in terms of returns. The finding that the government bond yield differentials and CPI differentials are the important factors in exchange rate forecasts further implies that interest rate parity and PPP have strong influence on foreign exchange market participants.

Deviations from the covered interest parity: The role of fundamentals, financial and political turmoil, and market frictions

Recent studies of mature markets on covered interest parity suggest that deviations are mean-reverting, but persistent, particularly after the 2008 crisis (Du et al., 2018). Our study contributes to the literature by modeling the deviations from covered interest rate parity (CIP) of an important emerging-market economy. We focus on Brazilian data, given the importance of its derivative market. One of the strengths of our study is the use of an agnostic approach, based on an automatic model-selection technique that is robust to structural change, the Autometrics algorithm (Hendry and Doornik, 2014), to unveil the possible determinants of CIP deviations from a wide information data set. We show that CIP deviations are highly sensitive to changes in Brazilian federal government total debt, level of reserves, inflation, and degree of trade openness. We also document the existence of instability in the model due to financial and political turmoil. We reach these conclusions based on the algorithm’s intercept correction, which can be seen as a byproduct of our methodology. Finally, we find evidence that, even after correction for fundamentals and instability points, CIP deviations still have persistence, suggesting that market frictions play an important role in the dynamics of CIP deviations.

Arbitrage Capital of Global Banks

We show that the role of unsecured, short-term wholesale funding for global banks has changed significantly in the post-financial-crisis regulatory environment. Global banks mainly use such funding to finance liquid, near risk-free arbitrage positions—in particular, the interest on excess reserves arbitrage and the covered interest rate parity arbitrage. In this environment, we examine the response of global banks to a large negative wholesale funding shock as a result of the U.S. money market mutual fund reform implemented in 2016. In contrast to past episodes of wholesale funding dry-ups, we find that the primary response of global banks to the reform was a cutback in arbitrage positions that relied on unsecured funding, rather than a reduction in loan provision.

Impact of Interest Rate Differential and Exchange Rate Movement on the Dynamics of Nigeria’s International Private Capital Flows

The study examines the impact of interest rate differential and exchange rate movement on the dynamics of Nigeria’s international private capital flows from 2010Q1 to 2019Q4. It uses the interest rate parity theory and the Markov Switching Time Varying Transition Probability Modelling approach. Findings show that interest rate differential does not explain the dynamics of aggregate capital and Foreign Direct Investment (FDI) flows, but significantly explains Foreign Portfolio Investment (FPI) flows. Also, Movement in real exchange rate is significant in explaining outflows and inflows in FPI, and inflows in FDI, but neutral to aggregate capital flows. The study concludes that deviations from interest rate parity provides opportunities for interest rate and currency arbitrage in Nigeria but using aggregate capital flows mask this evidence. The study therefore recommends that the CBN should focus on exchange rate stabilization policies, so as not only to discourage FPI reversal but to also enhance FDI inflow. This can be done by putting in place foreign reserve accretion measures to boost the ability of the CBN to defend the Naira. The new policy initiative on remittances is a right step in the right direction as it could boost external reserve.