ECB asset purchase programs effect on corporate bond issuance

The purpose of this thesis is to study the effect of European Central Bank asset purchase programs to corporate bond issuance in European countries. Thesis distinguishes between two main transmission channels of quantitative easing to corporate bond issuance by examining both the debt holdings and purchases effect during the ECB quantitative easing. Thesis employs a panel dataset of 15 499 bond issues from 19 European countries between years 2000 and 2015 with a series of explanatory variables controlling for changes in the macroeconomic environment and lending behavior. Countries are grouped to developed and frontier markets of the European Union to control for different characteristics in the level of integration to the European financial markets. Additional tests include various econometric techniques and tests for changes in the qualitative factors over the time period. Results suggest a significant positive relationship between the ECB debt holdings and the corporate bond issuance, i.e. stock effect, which is particularly strong in the developed economies of Europe. This provides further evidence on the existence of portfolio rebalancing where the investors are crowded out from assets that are targeted by the QE. Flow effects of the ECB purchases do not appear to have a significant impact on bond issuance in the European markets. Robustness tests indicate a strong influence from the foreign central banks and that the decrease in credit supply has increased corporate bond issuance after the financial crisis. Additionally, during the QE programs, the average credit rating has decreased indicating that companies with lower credit quality issue more debt during times of excess liquidity. These results provide information to the policy makers on the early impact of the ECB quantitative easing and a basis for analysis on the corporate lending behavior during unconventional monetary policies.fi=Opinnäytetyö kokotekstinä PDF-muodossa.|en=Thesis fulltext in PDF format.|sv=Lärdomsprov tillgängligt som fulltext i PDF-format

The impact of quantitative easing on the volatility of US and European corporate bond markets: A cross-country analysis

Objectives This paper seeks to first and foremost evaluate the nuances that differentiate quantitative easing (QE), as employed in the last financial crisis, from conventional monetary policies, with updates for the recent round of QE by the European Central Bank (ECB). Such differences then facilitate an investigation of whether QE by the Federal Reserve System and the ECB reduced volatility of domestic and international corporate bonds. We simultaneously assess potential transmission channels that could explain how any of the discovered effects transpired. Summary A review of literature and central bank data reveals technical intricacies of QE and interest rate targeting, and of US and Europe QE. The popular volatility modelling framework EGARCH, enhanced with exogenous variables to capture QE effects, is applied to broad-based Bloomberg US and European corporate bond indices. Conclusions QE is potent in reversing bond market turbulence that the 2008 financial crisis left in its wake, both on domestic and cross-border scales, consistent with the signaling channel. The portfolio balancing channel is evident for US QE only, and both asset purchase intensity and policy announcement are found to be ineffectual in reducing volatility, at least under this model specification

Relationships between Currency Carry Trade and Stock Markets

My paper examines the relationship between currency carry trade and stock market returns. In this exercise, I analyze the effects of Japanese yen-based and US dollar-based carry trade strategies on the stock market performance of both funding and investment currencies. Currency-specific profit measure, calculated as the difference between future (realized) spot exchange rate and today forward rate, is used as a proxy for carry trade return. Using the traditional regression equation with explicitly accounting for GARCH effects in the error term, I find that: (1) there are positively significant associations between carry trade return and stock market performance in the corresponding target currency countries (Australia, New Zealand and China); (2) the relationship between carry trade and stock market returns in the corresponding funding currency countries (Japan and US) is mixed. There is negatively significant association between US dollar-based carry trade and US stock market while the relationship between yen-based carry trade and Japanese stock market is positive. My results raise a possible dispute on the role of Japanese yen as a popular choice of funding currency in carry trade transactions. However, the finding is well supported with robustness check by introducing two explanatory factors (control variables), namely market “fear gauge” VIX and Bloomberg Commodity Price indexes

Exchange Rate and Industrial Commodity Volatility Transmissions and Hedging Strategies

This paper examines the inclusion of the dollar/euro exchange rate together with important commodities in two different BEKK, or multivariate conditional covariance, models. Such inclusion increases the significant direct and indirect past shock and volatility effects on future volatility between the commodities, as compared with their effects in the all-commodity basic model (Model 1), which includes the highly-traded aluminum, copper, gold and oil. Model 2, which includes copper, gold, oil and exchange rate, displays more direct and indirect transmission than does Model 3, which replaces the business cycle-sensitive copper with the highly energy-intensive aluminum. Optimal portfolios should have more Euro than commodities, and more copper and gold than oil. The multivariate conditional volatility models reveal greater volatility spillovers than their univariate counterparts.

Essays on financial integration

Financial integration has progressively increased over the past decade. Following the global financial crisis and the turmoil that ensued, external financing conditions changed. The global financial architecture went through significant adjustments consequently affecting global financing conditions. Emergent issues in response to the evolving global financial conditions included changes to monetary and financial sector regulation which had consequences for the capacity of banks to extend credit. Accordingly, the availability of credit is likely to have adversely affected the investment activity of firms, with potentially a more pronounced effect on for multinational corporations exposed to greater risk and information asymmetry associated with investing in foreign countries. In advanced economies, central banks pursued expansionary monetary policies to stimulate domestic economies by lowering the short-term policy interest rates. The central banks lowered the policy rate to the effective lower bound and resorted to unconventional tools of monetary policy in efforts to revive domestic economic activity. However, as a result of greater financial integration across countries, the unconventional monetary policies adopted by major economies also generated unintended consequences for countries abroad. International financial institutions which play a critical role in the intermediation and allocation of capital across countries also facilitated this cross-border transmission. Accordingly, the unconventional monetary policies pursued by the United States, United Kingdom, Japan and the European Central Bank instigated debate pertaining to the consequences of the spillover effects. Moreover, the evolving global financing conditions and low interest rate environment that ensued subsequent to the global financial crisis also catalysed the surge in capital flows going to emerging market and developing economies. Furthermore, a period of slow growth ensued in the aftermath of the global financial crisis. This slow global growth has been largely attributed to greater uncertainty which has been observed to have had a detrimental on real economic activity. Firms are more inclined to postpone large investment activities when uncertainty is high. Moreover, various types of uncertainty will probably influence firms and households' decisions differently. It is within this context that there has been a rise in prominence of policy debates on the role of different types of uncertainty for economic activity and most recently capital flows. Therefore, the focus of this thesis is the role of external financing conditions and uncertainty on multinational corporations' cross-border direct invest and the consequences of unconventional monetary policies implemented by major advanced economies on the portfolio allocation of institutional investors. The thesis presents three chapters in macroeconomics with an emphasis on cross-border capital flows and the role credit constraints and uncertainty and cross-border asset allocation of institutional investors in response to monetary policies in developed economies. The first empirical chapter examines the effects of country-specific financial market development on cross-border direct investment. It examines the extent to which financial development in source and host countries affects bilateral foreign direct investment (FDI). Using the gravity model, the effects of financial market development on outward foreign direct investment to emerging market and developing economies is investigated. Furthermore, it examines the role of the global financial crisis and idiosyncratic systemic banking crises on outward bilateral foreign direct investment. The main finding is that greater financial development in both origin and destination countries enhances outward bilateral foreign direct investment. The results confirm the volume of outward foreign direct investment to emerging market and developing economies declined with the global financial crisis. Furthermore, in source countries experiencing a systemic banking crisis, there is evidence that financial constraints reduced aggregate outward foreign direct investment. The second empirical chapter examines the international transmission of monetary policy through non-bank financial institutions. International financial institutions have a critical role in intermediating and allocating capital across countries and therefore facilitating cross-border transmission of monetary policy. Using quarterly data on individual institutional investors, this chapter studies the international transmission of monetary policy conducted by major advanced economies on the cross-border portfolio allocation of large institutional investors. The results reveal that in response to unconventional monetary policies, large institutional investors contributed to the surge in capital inflows to emerging markets and developing countries. While institutional investors contributed to the international transmission of monetary policy, the results also reveal that these policies prompted institutional investors to increase allocation at home. The results show cross-border transmission effects supportive of the portfolio balance and risk-taking channels of monetary policy transmission. The third empirical chapter examines whether foreign direct investment responds symmetrically to domestic and foreign uncertainty. The response of foreign direct investment to different types of uncertainty is empirically examined using the gravity model technique. Using bilateral foreign direct investment inflows, the results reveal that multinational corporations respond heterogeneously to different types of uncertainty in both source and host countries. Furthermore, this response is distinct between advanced economies and emerging markets economies recipients. Greater uncertainty regarding financial markets in the destination country deters foreign direct investment into the economy. However, this effect is only relevant for outward foreign direct investment going to advanced economies and is not relevant for emerging market and developing host countries. Political uncertainty in the host country reduces foreign direct investment to developed country destinations with no significant effects found for developing host countries. Similarly, macroeconomic uncertainty is only relevant in driving foreign direct investment flows to advanced economies. The empirical findings suggest that multinational corporations will respond to this aspect of uncertainty regarding economic activity in advanced economies and not in emerging market and developing economies. Generally, economic policy uncertainty in in both source and host countries discourages multinational corporations undertaking foreign direct investment activity. This negative effect is stronger for host country economic policy uncertainty. Nevertheless, there are distinct effects when country groups are considered. For foreign direct investment going into developed countries, higher economic policy uncertainty in the host country deters foreign direct investment inflows into the economy. Therefore, from the perspective of advanced economies, greater economic policy uncertainty is detrimental for attracting foreign direct investment in inflows. In contrast, for emerging market economies, economic policy uncertainty in the home country of the multinational corporation is found to be more important. This finding suggests that heightened economic policy uncertainty in the home country of the multinational corporation discourages outward foreign direct investment. This corroborates prior evidence in the empirical literature highlighting the relevance of the role of external supply-side factors in driving inflows to emerging market and developing host countries

"Exchange Rate and Industrial Commodity Volatility Transmissions and Hedging Strategies"

This paper examines the inclusion of the dollar/euro exchange rate together with important commodities in two different BEKK, or multivariate conditional covariance, models. Such inclusion increases the significant direct and indirect past shock and volatility effects on future volatility between the commodities, as compared with their effects in the all-commodity basic model (Model 1), which includes the highly-traded aluminum, copper, gold and oil. Model 2, which includes copper, gold, oil and exchange rate, displays more direct and indirect transmission than does Model 3, which replaces the business cycle-sensitive copper with the highly energy-intensive aluminum. Optimal portfolios should have more Euro than commodities, and more copper and gold than oil. The multivariate conditional volatility models reveal greater volatility spillovers than their univariate counterparts.

The impact of unconventional monetary policy announcements on emerging market asset prices

Submitted in fulfilment of the requirements for the Master of Management in Finance and InvestmentsAdvanced central banks have increased their balance sheets after the financial crisis which has raised concerns amongst market participants. However, there is no empirical evidence to provide guidance to on the optimal point of asset purchases. This paper examines spillover effects of unconventional monetary policy announcements from four advanced central banks on emerging market asset prices for the period 2009 to 2016. Vast amount of literature so far has focused on the spillover effects on advanced economies and mainly concentrates on announcements from the Federal Reserve. The research estimates the two day change on 15 emerging market economies’ asset prices. The results show that emerging market currencies exhibit higher returns against the Japanese Yen during the two day window period of the announcement being made. Bonds were more reactive to unconventional monetary policy than equities on days that announcements were made. Expectations of market participants were considered which showed that announcements made by the Bank of Japan (BOJ) were more anticipated by market participants which is an indication of how effective implementation of forward guidance has been over the years. The words and phrases used in making unconventional monetary policy announcements have had a significant effect on asset prices after the financial crisis.GR201