I consider limit order book events that are likely to contribute to price discovery in the foreign exchange market. These events involve transactions and limit orders. The variance decomposition shows that improving order and worsening cancel, these are limit order events, substantially contribute to price discovery. The impact of these on the permanent component of the exchange rate is quantitively equivalent to that of transaction. The implicit profit of transactions at the information event is marginal. I postulate that informed traders select limit order as their optimal strategy when the gain from their possessing information is small.
{"title":"Price Discovery via Limit Order in FX Market","authors":"Y. Kitamura","doi":"10.2139/ssrn.3740392","DOIUrl":"https://doi.org/10.2139/ssrn.3740392","url":null,"abstract":"I consider limit order book events that are likely to contribute to price discovery in the foreign exchange market. These events involve transactions and limit orders. The variance decomposition shows that improving order and worsening cancel, these are limit order events, substantially contribute to price discovery. The impact of these on the permanent component of the exchange rate is quantitively equivalent to that of transaction. The implicit profit of transactions at the information event is marginal. I postulate that informed traders select limit order as their optimal strategy when the gain from their possessing information is small.","PeriodicalId":381709,"journal":{"name":"ERN: International Finance (Topic)","volume":"11 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-06-26","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"130885268","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Purpose - The purpose of this study is to investigate how a country’s competitive tax policy influences its inward foreign direct investments (FDI) in the Asia-Pacific region, even when given particular constraints (e.g., population, public governance, skilled labor, and so on) exist.
Design/methodology/approach - The paper uses the system GMM estimation approach to test the hypothesis. Data on FDI, corporate income tax, and various confounding factors were drawn from Ernst and Young’s worldwide corporate tax guide, the World Bank, and other sources to create a panel of 28 economies over the period 2000-2016.
Findings - The present research confirms the negative association between corporate income tax (CIT) and FDI inflows. The effects of other confounding factors on FDI net inflows are also supported (e.g., connectivity, GDP per capita, population, skilled labor, and trade openness). Our results support the argument that foreign investments may be more sensitive to CIT. Therefore, CIT is an effective indicator to observe international tax competition.
Originality/value - The present research uses rich data on statutory CIT and other economic and public governance factors to investigate the relationship between tax competition and FDI inflows in the Asia-Pacific region. The findings add important supplements to the nuanced understanding of the political-economic dynamics in this region, especially when cut-throat tax competition, trade tensions, and stagnant economic growth have been key challenges for global economies.
目的-本研究的目的是调查一个国家的竞争性税收政策如何影响其在亚太地区的外国直接投资(FDI)，即使给定特定的限制(例如，人口，公共治理，熟练劳动力等)存在。设计/方法/方法-本文使用系统GMM估计方法来测试假设。FDI、企业所得税和各种混杂因素的数据来自安永(Ernst and Young)的全球企业税收指南、世界银行(World Bank)和其他来源，以创建一个由28个经济体组成的2000年至2016年期间的小组。研究结果-目前的研究证实了企业所得税(CIT)和FDI流入之间的负相关关系。其他混杂因素对FDI净流入的影响也得到了支持(如连通性、人均GDP、人口、熟练劳动力和贸易开放)。我们的研究结果支持了外国投资可能对CIT更为敏感的观点，因此CIT是观察国际税收竞争的有效指标。原创性/价值-本研究利用法定CIT和其他经济和公共治理因素的丰富数据来调查亚太地区税收竞争与外国直接投资流入之间的关系。这些发现为我们对该地区政治经济动态的细致理解提供了重要补充，尤其是在残酷的税收竞争、贸易紧张局势和经济增长停滞已成为全球经济面临的主要挑战的情况下。
{"title":"International Tax Competition and Foreign Direct Investment in the Asia-Pacific Region: A Panel Data Analysis","authors":"Chengwei Xu, Alfred M. Wu","doi":"10.2139/ssrn.3771050","DOIUrl":"https://doi.org/10.2139/ssrn.3771050","url":null,"abstract":"Purpose - The purpose of this study is to investigate how a country’s competitive tax policy influences its inward foreign direct investments (FDI) in the Asia-Pacific region, even when given particular constraints (e.g., population, public governance, skilled labor, and so on) exist.<br><br>Design/methodology/approach - The paper uses the system GMM estimation approach to test the hypothesis. Data on FDI, corporate income tax, and various confounding factors were drawn from Ernst and Young’s worldwide corporate tax guide, the World Bank, and other sources to create a panel of 28 economies over the period 2000-2016.<br><br>Findings - The present research confirms the negative association between corporate income tax (CIT) and FDI inflows. The effects of other confounding factors on FDI net inflows are also supported (e.g., connectivity, GDP per capita, population, skilled labor, and trade openness). Our results support the argument that foreign investments may be more sensitive to CIT. Therefore, CIT is an effective indicator to observe international tax competition. <br><br>Originality/value - The present research uses rich data on statutory CIT and other economic and public governance factors to investigate the relationship between tax competition and FDI inflows in the Asia-Pacific region. The findings add important supplements to the nuanced understanding of the political-economic dynamics in this region, especially when cut-throat tax competition, trade tensions, and stagnant economic growth have been key challenges for global economies.<br>","PeriodicalId":381709,"journal":{"name":"ERN: International Finance (Topic)","volume":"25 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-01-22","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"125353618","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We use sign-identified macroeconomic models to study the interaction of financial sector and sovereign credit risks in Europe. We find that country-specific financial sector bailout shocks do not generate strong international spillovers, because they primarily transfer private sector risk onto the local sovereign. By contrast, sovereign risk shocks generate substantial spillovers onto the global financial sector and for international sovereign debt markets. We conclude that any financial sector bailout policy that undermines the creditworthiness of the affected sovereign is likely to exacerbate global credit risk. Our findings highlight the unintended global consequences of country-specific financial sector bailout programmes.
{"title":"On the International Spillover Effects of Country-Specific Financial Sector Bailouts and Sovereign Risk Shocks","authors":"Matthew Greenwood‐Nimmo, V. Nguyen, Eliza Wu","doi":"10.2139/ssrn.3760930","DOIUrl":"https://doi.org/10.2139/ssrn.3760930","url":null,"abstract":"We use sign-identified macroeconomic models to study the interaction of financial sector and sovereign credit risks in Europe. We find that country-specific financial sector bailout shocks do not generate strong international spillovers, because they primarily transfer private sector risk onto the local sovereign. By contrast, sovereign risk shocks generate substantial spillovers onto the global financial sector and for international sovereign debt markets. We conclude that any financial sector bailout policy that undermines the creditworthiness of the affected sovereign is likely to exacerbate global credit risk. Our findings highlight the unintended global consequences of country-specific financial sector bailout programmes.","PeriodicalId":381709,"journal":{"name":"ERN: International Finance (Topic)","volume":"81 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-11-10","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"132624451","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
The multiple change points estimation internally identifies the monetary expansion or monetary contraction, the monetary policy interchange, the currency reform breaks, and the routine operational transitions on the multivariate dimensions of the China government bond yields. The external monetary transmissions are separating into the blocks with the conventional monetary policy and zero lower bound period. The recursively identified VAR models are respectively capture the daily interest rate co-movements spreading from the global trends to the destination country in the short run restrictions, the weekly fluctuation transitions from the systematic risks and uncertainty in the financial markets in the medium run, and the monthly compounding interaction mechanism from stock market, government bond market and international monetary transmission in the long run.
{"title":"Internal Change Points and External Transmissions","authors":"L. Hao","doi":"10.2139/ssrn.3702837","DOIUrl":"https://doi.org/10.2139/ssrn.3702837","url":null,"abstract":"The multiple change points estimation internally identifies the monetary expansion or monetary contraction, the monetary policy interchange, the currency reform breaks, and the routine operational transitions on the multivariate dimensions of the China government bond yields. The external monetary transmissions are separating into the blocks with the conventional monetary policy and zero lower bound period. The recursively identified VAR models are respectively capture the daily interest rate co-movements spreading from the global trends to the destination country in the short run restrictions, the weekly fluctuation transitions from the systematic risks and uncertainty in the financial markets in the medium run, and the monthly compounding interaction mechanism from stock market, government bond market and international monetary transmission in the long run.","PeriodicalId":381709,"journal":{"name":"ERN: International Finance (Topic)","volume":"18 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-09-26","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"115125042","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Deven Bathia, Rıza Demirer, Rangan Gupta, Kevin Kotzé
This paper provides a long-term perspective to the causal linkages between currency dynamics and macroeconomic conditions by utilising a long span data set for the United Kingdom that extends back to 1856 and a time-varying causality testing methodology that accounts for the nonlinearity and structural breaks. Using unemployment fluctuations as a proxy for macroeconomic conditions and wavelet decompositions to obtain the fundamental factor that drives excess returns for the British pound, time varying causality tests based on alternative model specifications yield significant evidence of causal linkages and information spillovers across the labour and currency markets over the majority of the sample. Causal effects seem to strengthen during the Great Depression and later following the collapse of the Bretton Woods system, highlighting the role of economic crises in the predictive linkages between the two markets. While the predictive role of currency market dynamics over unemployment fluctuations reflects the effect of exchange rate volatility on corporate investment decisions, which in turn, drives subsequent labour market dynamics (e.g. Belke & Gros (2001); Belke & Kaas (2004); Feldman (2011); among others), we argue that causality in the direction of exchange rates from unemployment possibly reflects the signals regarding monetary policy actions, which in turn, spills over to financial markets. Overall, the findings indicate significant information spillovers across the labour and currency markets in both directions with significant policy making implications.
{"title":"Unemployment Fluctuations and Currency Returns in the United Kingdom: Evidence from Over One and a Half Century of Data","authors":"Deven Bathia, Rıza Demirer, Rangan Gupta, Kevin Kotzé","doi":"10.2139/ssrn.3744539","DOIUrl":"https://doi.org/10.2139/ssrn.3744539","url":null,"abstract":"This paper provides a long-term perspective to the causal linkages between currency dynamics and macroeconomic conditions by utilising a long span data set for the United Kingdom that extends back to 1856 and a time-varying causality testing methodology that accounts for the nonlinearity and structural breaks. Using unemployment fluctuations as a proxy for macroeconomic conditions and wavelet decompositions to obtain the fundamental factor that drives excess returns for the British pound, time varying causality tests based on alternative model specifications yield significant evidence of causal linkages and information spillovers across the labour and currency markets over the majority of the sample. Causal effects seem to strengthen during the Great Depression and later following the collapse of the Bretton Woods system, highlighting the role of economic crises in the predictive linkages between the two markets. While the predictive role of currency market dynamics over unemployment fluctuations reflects the effect of exchange rate volatility on corporate investment decisions, which in turn, drives subsequent labour market dynamics (e.g. Belke & Gros (2001); Belke & Kaas (2004); Feldman (2011); among others), we argue that causality in the direction of exchange rates from unemployment possibly reflects the signals regarding monetary policy actions, which in turn, spills over to financial markets. Overall, the findings indicate significant information spillovers across the labour and currency markets in both directions with significant policy making implications.","PeriodicalId":381709,"journal":{"name":"ERN: International Finance (Topic)","volume":"17 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-09-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"131342385","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
A. Polbin, Andrey Shumilov, Bedin A.F., A. Kulikov
Russian Abstract: В работе анализируется взаимосвязь реального обменного курса рубля и реальных цен на нефть на основе модели коррекции ошибок с марковскими переключениями режимов, позволяющей учесть изменения политики курсообразования. Показано, что в период 1999-2018 гг. хорошо разделяются два режима динамики реального курса: с быстрым и медленным приспособлением к долгосрочному равновесию в ответ на шоки цены нефти. При этом не отвергается гипотеза о том, что долгосрочная взаимосвязь между реальным обменным курсом и ценой на нефть инвариантна к изменению режима. Также показано, что, несмотря на переход к плавающему обменному курсу, в последние годы периодически идентифицируется режим негибкого курсообразования, что может быть связано с новым бюджетным правилом, согласно которому с февраля 2017 г. Минфин России ежемесячно покупал иностранную валюту в объеме превышения фактических поступлений нефтегазовых доходов над уровнем нефтегазовых доходов федерального бюджета, сформированного при цене на нефть марки “Юралс” 40 долларов США за баррель.
English Abstract: The paper analyzes the relationship between the real Russian ruble exchange rate and real oil prices using the error correction model with Markov regime switching, which allows for changes in exchange rate policy. It is found that during the period 1999-2018 real exchange rate dynamics was characterized by two clearly distinguishable regimes, one with fast and the other with slow adjustment to long-term equilibrium in response to oil price shocks. Further model testing shows that long-term relationship between real exchange rate and oil price is invariant to regime change. It is also found that, despite adoption of a floating exchange rate policy in 2014, inflexible real exchange rate regime has been periodically identified in recent years. This could be due to the new budget rule, according to which Russian Ministry of Finance in February 2017 started purchasing foreign currencies in amount of excess oil and gas earnings of the federal budget.
{"title":"Модель реального обменного курса рубля с марковскими переключениями режимов (Model of the Real Exchange Rate of the Ruble With Markov Mode Switches)","authors":"A. Polbin, Andrey Shumilov, Bedin A.F., A. Kulikov","doi":"10.2139/ssrn.3712975","DOIUrl":"https://doi.org/10.2139/ssrn.3712975","url":null,"abstract":"<b>Russian Abstract:</b> В работе анализируется взаимосвязь реального обменного курса рубля и реальных цен на нефть на основе модели коррекции ошибок с марковскими переключениями режимов, позволяющей учесть изменения политики курсообразования. Показано, что в период 1999-2018 гг. хорошо разделяются два режима динамики реального курса: с быстрым и медленным приспособлением к долгосрочному равновесию в ответ на шоки цены нефти. При этом не отвергается гипотеза о том, что долгосрочная взаимосвязь между реальным обменным курсом и ценой на нефть инвариантна к изменению режима. Также показано, что, несмотря на переход к плавающему обменному курсу, в последние годы периодически идентифицируется режим негибкого курсообразования, что может быть связано с новым бюджетным правилом, согласно которому с февраля 2017 г. Минфин России ежемесячно покупал иностранную валюту в объеме превышения фактических поступлений нефтегазовых доходов над уровнем нефтегазовых доходов федерального бюджета, сформированного при цене на нефть марки “Юралс” 40 долларов США за баррель.<br><br><b>English Abstract:</b> The paper analyzes the relationship between the real Russian ruble exchange rate and real oil prices using the error correction model with Markov regime switching, which allows for changes in exchange rate policy. It is found that during the period 1999-2018 real exchange rate dynamics was characterized by two clearly distinguishable regimes, one with fast and the other with slow adjustment to long-term equilibrium in response to oil price shocks. Further model testing shows that long-term relationship between real exchange rate and oil price is invariant to regime change. It is also found that, despite adoption of a floating exchange rate policy in 2014, inflexible real exchange rate regime has been periodically identified in recent years. This could be due to the new budget rule, according to which Russian Ministry of Finance in February 2017 started purchasing foreign currencies in amount of excess oil and gas earnings of the federal budget.","PeriodicalId":381709,"journal":{"name":"ERN: International Finance (Topic)","volume":"108 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-07-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"131792270","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Muhammad Aftab, R. Ahmad, Izlin Ismail, Kate Phylaktis
The paper examines the impact of economic integration on the relationship between the currency and equity markets for a group of Asian emerging economies using both linear and nonlinear frameworks. We first derive the dynamic conditional correlations between the two markets and then examine the impact of economic integration on their relationship. Our main results are: (i) there is a negative correlation between real exchange rate changes and equity return differentials for all countries apart from China, which becomes deeper during the GFC for some of the countries; (ii) economic integration, both real and financial, has an asymmetric impact on the relationship between the two markets both in the short-run and in the long-run; and (iii) applying a linear framework does not bring out the impact of financial integration.
{"title":"Economic Integration and the Currency and Equity Markets Nexus","authors":"Muhammad Aftab, R. Ahmad, Izlin Ismail, Kate Phylaktis","doi":"10.2139/ssrn.3434379","DOIUrl":"https://doi.org/10.2139/ssrn.3434379","url":null,"abstract":"The paper examines the impact of economic integration on the relationship between the currency and equity markets for a group of Asian emerging economies using both linear and nonlinear frameworks. We first derive the dynamic conditional correlations between the two markets and then examine the impact of economic integration on their relationship. Our main results are: (i) there is a negative correlation between real exchange rate changes and equity return differentials for all countries apart from China, which becomes deeper during the GFC for some of the countries; (ii) economic integration, both real and financial, has an asymmetric impact on the relationship between the two markets both in the short-run and in the long-run; and (iii) applying a linear framework does not bring out the impact of financial integration.","PeriodicalId":381709,"journal":{"name":"ERN: International Finance (Topic)","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-06-22","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"114714418","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Remittance inflows to Egypt have been increasing rapidly for the last three decades, making it one of the largest remittances- receiving country in the world and the leading one in the Middle East region. Theoretically remittances could help avoid balance of payment crisis, provide a constant source of foreign exchange and reduce the poverty severity in home developing countries, hence, representing a vital channel for sustainable economic development. Thereby it is worthy to figure out the key remittances-influencing factors to examine the elements to which remittances are sensitive to. Accordingly, this paper aims at identifying the macroeconomic determinants of migrants‟ remittances to Egypt during the period (1980-2018). Through applying ARDL model. Findings reveal that variables concerning exchange rate, GDP per capita, political and economic condition in the home country are statistically significant supporting the remittances decay hypothesis and confirming that remittances hedge against macroeconomic shocks and appear to be counter-cyclical. This calls for a policy of a sustained economic growth that directed remittance savings toward productive domestic investments.
{"title":"The Macroeconomic Determinants of Migrants’ Remittances in Egypt: An Ardl Bounds Testing Approach","authors":"Rasha Qutb","doi":"10.2139/ssrn.3522070","DOIUrl":"https://doi.org/10.2139/ssrn.3522070","url":null,"abstract":"Remittance inflows to Egypt have been increasing rapidly for the last three decades, making it one of the largest remittances- receiving country in the world and the leading one in the Middle East region. Theoretically remittances could help avoid balance of payment crisis, provide a constant source of foreign exchange and reduce the poverty severity in home developing countries, hence, representing a vital channel for sustainable economic development. Thereby it is worthy to figure out the key remittances-influencing factors to examine the elements to which remittances are sensitive to. Accordingly, this paper aims at identifying the macroeconomic determinants of migrants‟ remittances to Egypt during the period (1980-2018). Through applying ARDL model. Findings reveal that variables concerning exchange rate, GDP per capita, political and economic condition in the home country are statistically significant supporting the remittances decay hypothesis and confirming that remittances hedge against macroeconomic shocks and appear to be counter-cyclical. This calls for a policy of a sustained economic growth that directed remittance savings toward productive domestic investments.","PeriodicalId":381709,"journal":{"name":"ERN: International Finance (Topic)","volume":"58 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-12-07","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"125671938","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Agustín S. Bénétrix, Deepali Gautam, Luciana Juvenal, Martin Schmitz
This paper provides a dataset on the currency composition of the international investment position for a group of 50 countries for the period 1990-2017. It improves available data based on estimates by incorporating actual data reported by statistical authorities and refining estimation methods. The paper illustrates current and new uses of these data, with particular focus on the evolution of currency exposures of cross-border positions.
{"title":"Cross-Border Currency Exposures: New Evidence Based on an Enhanced and Updated Dataset","authors":"Agustín S. Bénétrix, Deepali Gautam, Luciana Juvenal, Martin Schmitz","doi":"10.2139/ssrn.3611655","DOIUrl":"https://doi.org/10.2139/ssrn.3611655","url":null,"abstract":"This paper provides a dataset on the currency composition of the international investment position for a group of 50 countries for the period 1990-2017. It improves available data based on estimates by incorporating actual data reported by statistical authorities and refining estimation methods. The paper illustrates current and new uses of these data, with particular focus on the evolution of currency exposures of cross-border positions.","PeriodicalId":381709,"journal":{"name":"ERN: International Finance (Topic)","volume":"6 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-12-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"114557966","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We find that an option-based equity tail risk factor is priced in the cross section of currency returns. Currencies highly exposed to this factor offer a low risk premium because they hedge against equity tail risk. In a reduced-form model, we show that a long-short portfolio that buys currencies with high equity tail beta and shorts those with low tail beta extracts the global component embedded in the tail risk factor. Inspired by the model, we construct a novel global tail risk factor from currency returns. The estimated price of risk of this global factor is consistently negative and of similar magnitude in various currency portfolios including carry and momentum, suggesting that the excess returns of these strategies can be partially understood as compensations for global tail risk.
{"title":"Equity Tail Risk and Currency Risk Premia","authors":"Zhenzhen Fan, Juan M. Londoño, Xiao Xiao","doi":"10.2139/ssrn.3399980","DOIUrl":"https://doi.org/10.2139/ssrn.3399980","url":null,"abstract":"We find that an option-based equity tail risk factor is priced in the cross section of currency returns. Currencies highly exposed to this factor offer a low risk premium because they hedge against equity tail risk. In a reduced-form model, we show that a long-short portfolio that buys currencies with high equity tail beta and shorts those with low tail beta extracts the global component embedded in the tail risk factor. Inspired by the model, we construct a novel global tail risk factor from currency returns. The estimated price of risk of this global factor is consistently negative and of similar magnitude in various currency portfolios including carry and momentum, suggesting that the excess returns of these strategies can be partially understood as compensations for global tail risk.<br>","PeriodicalId":381709,"journal":{"name":"ERN: International Finance (Topic)","volume":"47 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-11-19","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"127286173","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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