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Business and Economics > Investments: Stocks

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Cover IMF Working Papers
A New Wave of ECB’s Unconventional Monetary Policies: Domestic Impact and Spillovers
Mr. Richard Varghese
and
Ms. Yuanyan S Zhang
ECB President Draghi’s Jackson Hole speech in August 2014 arguably marked a new phase of unconventional monetary policies (UMPs) in the euro area. This paper examines the market impact and tranmission channels of this new wave of UMPs using a modified event study framework. They are found to have a more prominent impact on inflation expectations and exchange rates compared to the earlier UMP announcements. The impact on bank equity, however, is less significant in part due to narrowing profit margin in a low interest rate environment; and the marginal effect on sovereign spread compression has diminished. By extracting components of monetary policy shocks from the yield curve, we find that the traditional signaling channel of the monetary policy transmission continued to play an important role, but the portfolio rebalancing channel became more important in the new phase. Spillovers to non-euro area EU countries (the Czech Republic, Denmark, Poland, and Sweden) are transmitted mainly through the portfolio rebalancing channel, largely affecting sovereign yields and exchange rates.
Keywords:
WP; monetary policy; market; factor; market factor; Yield Curve; Quantitative Easing; Event Study; QE announcement; signal factor; monetary policy surprise; monetary policy announcement; inflation expectation; bank equity; Bond yields; Unconventional monetary policies; Sovereign bonds; Stocks
Cover IMF Staff Country Reports
Finland: Selected Issues
International Monetary Fund. European Dept.
This Selected Issues paper examines Finland’s sectoral balance sheets and how they have evolved since the global financial crisis; the analysis reveals that financial vulnerabilities have risen in most sectors. Indebtedness has increased for nonfinancial corporations (NFCs), households, and the government, increasing their financial fragility and vulnerability to shocks. Also, cross-border financial exposures have risen on both sides of Finland’s balance sheet. Specifically, banks’ balance sheets have grown considerably, largely owing to a rise in foreign liabilities. NFCs and the government have also relied in part on foreign investors to finance their debt increases.
Keywords:
ISCR; CR; firm; private sector; firm productivity; product market; firm TFP; accounts payable; productivity gain; company size; Productivity; Financial statements; Commodity markets; Total factor productivity; Stocks; Global
Cover IMF Staff Country Reports
Ireland: Financial Sector Assessment Program: Technical Note-Nonbank Sector Stability Analyses
International Monetary Fund. Monetary and Capital Markets Department
This Technical Note discusses the findings and recommendations made in the Financial Sector Assessment Program for Ireland in the areas of nonbank sector stability. Both nonparametric and parametric methods suggest that the residential real estate market in Ireland is close to or moderately below its equilibrium level. Two standard metrics of price-to-income and price-to-rent ratios show that following a protracted period of overvaluation prior to the crisis and a correction afterward, the market has been close to its equilibrium level in recent quarters. Households have deleveraged, but are still highly indebted. The stability analysis results also suggest that vulnerabilities among nonfinancial firms have moderated in recent years.
Keywords:
ISCR; CR; interest rate; banking sector; sensitivity analysis; investment funds; negative equity; interest rate shock; long-term debt; household financial assets; primary sector; CRE price; current ratio; Loans; Mortgages; Housing prices; Stocks; Corporate sector; Global; Europe; Markov regime; balance sheet composition of financial assets; Household indebtedness; loss forecasting; liabilities of household; real estate investment trust; evaluation of REE price; Tier 1
Cover IMF Working Papers
Thin Capitalization Rules and Multinational Firm Capital Structure
Jennifer Blouin
,
Harry Huizinga
,
Mr. Luc Laeven
, and
Gaetan Nicodeme
This paper examines the impact of thin capitalization rules that limit the tax deductibility of interest on the capital structure of the foreign affiliates of US multinationals. We construct a new data set on thin capitalization rules in 54 countries for the period 1982-2004. Using confidential data on the internal and total leverage of foreign affiliates of US multinationals, we find that thin capitalization rules significantly affect multinational firm capital structure. Specifically, restrictions on an affiliate’s debt-to-assets ratio reduce this ratio on average by 1.9%, while restrictions on an affiliate’s borrowing from the parent-to-equity ratio reduce this ratio by 6.3%. Also, restrictions on borrowing from the parent reduce the affiliate’s debt-to-assets ratio by 0.8%, which shows that rules targeting internal leverage have an indirect effect on the overall indebtedness of affiliate firms. The impact of capitalization rules on affiliate leverage is higher if their application is automatic rather than discretionary. Furthermore, thin capitalization regimes have aggregate firm effects: they reduce the firm’s aggregate interest expense but lower firm valuation. Overall, our results show than thin capitalization rules, which thus far have been understudied, have a substantial effect on the capital structure within multinational firms, with implications for the firm’s market valuation.
Keywords:
WP; leverage restriction; interest expense; leverage ratio; interest deductibility; affiliate debt; Thin capitalization rule; Multinational firm; Capital structure; Taxation; rate of inflation; Thin capitalization rules; Domestic debt; Transnational corporations; Stocks; Global
Cover IMF Working Papers
Bank Behavior in Response to Basel Iii: A Cross-Country Analysis
Mr. Thomas F. Cosimano
and
Ms. Dalia S Hakura
This paper investigates the impact of the new capital requirements introduced under the Basel III framework on bank lending rates and loan growth. Higher capital requirements, by raising banks’ marginal cost of funding, lead to higher lending rates. The data presented in the paper suggest that large banks would on average need to increase their equity-to-asset ratio by 1.3 percentage points under the Basel III framework. GMM estimations indicate that this would lead large banks to increase their lending rates by 16 basis points, causing loan growth to decline by 1.3 percent in the long run. The results also suggest that banks’ responses to the new regulations will vary considerably from one advanced economy to another (e.g. a relatively large impact on loan growth in Japan and Denmark and a relatively lower impact in the U.S.) depending on cross-country variations in banks’ net cost of raising equity and the elasticity of loan demand with respect to changes in loan rates.
Keywords:
WP; loan rate; loan demand; financial crisis; largest bank; Commercial banks; capital constraints; equity-to-asset ratio; expense ratio; bank capital; bank equity; Loans; Stocks; Demand elasticity; Basel III; Global
Cover IMF Working Papers
Valuation of Unlisted Direct Investment Equity
Thomas Elkjaer
,
Jannick Damgaard
, and
Emmanuel O. Kumah
This paper analyzes the seven valuation methods for unlisted direct investment equity included in the recently adopted IMF Balance of Payments and International Investment Position Manual, Sixth Edition (BPM6). Based on publicly available Danish data, we test the three methods that are generally applicable and find that the choice of valuation method and estimation technique can have a highly significant impact on the international investment position, pointing to the need for further harmonization. The results show that the price-to-book value method generates more robust market value estimates than the price-to-earnings method. This finding suggests that the valuation basis for the forthcoming Coordinated Direct Investment Survey - own funds at book value -will provide useful information for compiling the international investment position.
Keywords:
WP; accounting data; earnings before interest and taxes; risk premium; valuation model
Cover IMF Working Papers
Country and Industry Dynamics in Stock Returns
Mr. Luis Catão
and
Mr. Allan Timmermann
A perennial question in international finance is to what extent stock returns are influenced by country-location, as opposed to industry-affiliation, factors. This paper develops a novel methodology to measure these effects, in which portfolios mimicking "pure" country and industry factors are first constructed and their joint dynamics then modeled as regime-switching processes. Estimation using global firm-level data allows us to identify well-defined volatility states over the past thirty years and shows that the contribution of the industry factor becomes systematically more prominent during high global volatility states, while the country factor contribution declines. Using the model's estimates, we find that portfolio diversification possibilities vary considerably across economic states.
Keywords:
WP; industry portfolio; country portfolio; volatility State; Diversification; Risk; Volatility States; Regime Switching; International Financial Markets; country effect; industry factor; industry state process; Stocks; Market capitalization; Stock markets; Public expenditure review; Time series analysis; Global; Europe
Cover IMF Working Papers
Signaling Fiscal Regime Sustainability
Mr. Alessandro Prati
and
Francesco Drudi
This paper proposes a signaling model that offers a new perspective on why governments deviate from optimal tax smoothing and delay debt stabilization. In our model, dependable—but not fully credible—governments have an incentive to tighten the fiscal regime when the signaling effect on credit ratings is larger (that is, when a sufficiently large stock of debt has been accumulated). At this point, they may deviate from tax smoothing not to be mimicked by weak governments. The model predicts that primary balances and debt stocks are complementary inputs in the credit rating function as tests on Italian, Irish, Belgian, and Danish data show.
Keywords:
WP; debt stock; monetary policy; mover accent; signaling; fiscal stabilization; tax smoothing; debt sustainability; credit ratings; debt financing cost; debt level; debt maturing; rating function; debt accumulation; stock of debt; Fiscal stance; Stocks; Global; equilibrium existence; signaling model; Balance-to-GDP ratio; pooling equilibrium