An Expanded Graphical Representation of the Portfolio Balance Model of Exchange Rate Determination

1994 ◽  
Vol 38 (2) ◽  
pp. 52-57 ◽  
Author(s):  
Joachim Zietz
Keyword(s):  
Exchange Rate ◽  
Graphical Representation ◽  
Balance Model ◽  
Exchange Rate Determination ◽  
Portfolio Balance ◽  
Foreign Bonds ◽  
Diagram Representation

The traditional one-diagram representation of the portfolio balance model gets high marks for conciseness and efficiency but falls short in providing an intuitive understanding of the forces that drive the model. This paper offers an expanded graphical representation of the model. It features a diagram for each of the three assets considered by the portfolio balance model, domestic bonds, foreign bonds, and domestic money. The purpose is to make the economic adjustments that are taking place in the model's markets more intuitively obvious.

Common Factors and Local Factors: Implications for Term Structures and Exchange Rates

2004 ◽  
Vol 39 (1) ◽  
pp. 69-102 ◽  
Author(s):  
Dong-Hyun Ahn
Keyword(s):  
Exchange Rate ◽  
Term Structure ◽  
Risk Premia ◽  
Necessary Condition ◽  
Local Factors ◽  
Forward Premium ◽  
Term Structures ◽  
Bond Portfolio ◽  
Premium Puzzle ◽  
Foreign Bonds

AbstractThis paper studies a multi-factor, two-country term structure and exchange rate model when a diversification effect for an international bond portfolio is expected. It shows that the diversification gain calls upon certain restrictions on the process of the stochastic discount factor in a factor-structured economy. Existence of local factors is shown to be a necessary condition for the gains from investing in foreign bonds. Further, the exchange rate risk premia are shown to be a function of the differentials of the risk premia of the factors in bond returns. Empirical results reveal the tendency for investors to respond sensitively to rare shocks, which is shown to be a potential solution to the forward premium puzzle.

Exchange Rate Dynamics, Endogenous Risk Premium and the Balance Sheet Effect: An Effective Demand Model

2018 ◽  
Vol 7 (2) ◽  
pp. 212-239
Author(s):  
Moumita Basu ◽  
Jonaki Sengupta ◽  
Ranjanendra Narayan Nag
Keyword(s):  
Exchange Rate ◽  
Fiscal Policy ◽  
Interest Rate ◽  
Risk Premium ◽  
Balance Sheet ◽  
Endogenous Risk ◽  
Exchange Rate Dynamics ◽  
Tariff Liberalization ◽  
Foreign Bonds ◽  
Exchange Rate Depreciation

This article describes a macroeconomic framework for analysing the interaction between output, domestic interest rate and exchange rate in the presence of the endogenous risk premium and balance sheet effect of exchange rate depreciation on investment demand. Output is demand determined. There are three assets: money, domestic bonds and foreign bonds. Domestic bonds and foreign bonds are not perfect substitutes due to the presence of risk premium. The endogenous risk premium depends on certain macroeconomic fundamentals, namely budget deficit and current account balance. Using this framework, we will examine implications of monetary policy, fiscal policy, tariff liberalization and global interest rate hike for exchange rate dynamics and output. The balance sheet effect and the risk premium together explain how an expansionary fiscal policy may generate recession, while tariff liberalization may produce favourable macroeconomic outcomes. Moreover, the model shows that an increase in world interest rate may have contractionary effect on the domestic output level due to the presence of the balance sheet effect of exchange rate depreciation. JEL Classification: E27, E63, F13, F32

Credit Spread Disparity Between Japanese Domestic Bonds and Foreign Bonds

2021 ◽  
Author(s):  
Ikuko SHIIYAMA
Keyword(s):  
Empirical Study ◽  
Credit Risk ◽  
Foreign Market ◽  
Domestic Market ◽  
Credit Spread ◽  
Credit Spreads ◽  
Foreign Investors ◽  
Foreign Bonds ◽  
Risk Free Rate ◽  
Free Rate

Abstract This article is an empirical study of credit spread disparity between Japanese domestic bonds and foreign bonds on primary issuance. There exist differences between credit spreads issued in domestic market and that of foreign market, despite that the credit risk of these bonds are considered the same. We explore this issue and find that the disparity can be explained by the sensitivity to risk-free rate and leverage. In other words, foreign investors put more premium on the credit risk which is driven by risk-free rate factor and leverage factor.

Towards a More Ethical Lending to Sovereigns

2018 ◽  
pp. 339-358
Author(s):  
Barry Herman
Keyword(s):  
Human Rights ◽  
Social Spending ◽  
Actual Case ◽  
Sovereign Bond ◽  
Foreign Government ◽  
Per Se ◽  
The Government ◽  
Foreign Bonds ◽  
The Right ◽  
The Relationship

This chapter examines the relationship between a private household in one country and the foreign government whose bond the household has purchased. What is the ‘right’ thing for a household to want to do when the government encounters economic difficulties and faces pressure to cut back social spending that was advancing human rights objectives? Individual bondholders are in any case rarely empowered to act on their ethical priorities. The nature of sovereign bond contracts gives ethical savers little room to give vent to their ethical preference. The chapter also specifies the concerns that ethical savers have to face when they have lent to a sovereign government that defaults on its foreign bonds. After specifying the characteristics of the problem, the chapter addresses an actual case in point, which, while not a sovereign case per se, involves the essential characteristics of the sovereign case. It will be argued that the source of the ethical frustration derives from the structure of the bond contract. The suggested solution is to redesign sovereign bond contracts in a more human rights-supportive way.

Foreign Affairs

2020 ◽  
pp. 50-69
Author(s):  
Arthur E. Wilmarth Jr.
Keyword(s):  
Latin America ◽  
Adverse Effects ◽  
Eastern Europe ◽  
Private Investment ◽  
Foreign Affairs ◽  
Investment Banks ◽  
Stock Market Crash ◽  
Foreign Bonds ◽  
Credit Boom ◽  
The U.S

A speculative and unstable credit boom occurred in overseas markets during the 1920s, as universal banks and private investment banks competed aggressively to sell more than $12 billion of foreign bonds to U.S. investors. The resulting surge in overseas lending left many governments and private sector borrowers in Central and Eastern Europe and Latin America in a dangerously exposed position when U.S. investors lost their appetite for foreign bonds at the end of the 1920s. Universal banks and investment banks sold many unsound foreign bonds to unsophisticated and trusting American investors. The massive sales of risky domestic and foreign securities by universal banks and investment banks had highly adverse effects on the U.S. economy, foreign economies, and investors when the domestic and overseas financing booms abruptly ended following the stock market crash in late 1929.

Foreign Bonds to Eurobonds

1975 ◽  
pp. 18-33
Author(s):  
Brian Scott Quinn
Keyword(s):  
Foreign Bonds
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