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Banque Nationale De Belgique Sa — Technical Presentation (December 2024)

16 slides from Banque Nationale De Belgique Sa's technical presentation, December 2024

  1. Slide 1: Discussion of Speculation, Forward Exchange Demand, and CIP deviations in Emerging Economies

    Discussion of “Speculation, Forward Exchange Demand, and CIP deviations in Emerging Economies” by Pierre De Leo, Lorena Keller Dongchen Zou Julien Pénasse University of Luxembourg 14th Workshop on Exchange Rates, December 2024

  2. Slide 2: Covered Interest Parity (CIP) deviations after the Great Recession

    Covered Interest Parity (CIP) deviations after the Great Recession Source: Du, W., Tepper, A., & Verdelhan, A. (2018). Deviations from covered interest rate parity. The Journal of Finance, 73(3), 915-957. 2 / 16

  3. Slide 3: Covered Interest Parity (CIP)

    Covered Interest Parity (CIP) Absent frictions, two ways to obtain dollars without risk between t and t + 1: 1. Invest in the dollar risk-free asset and earn the log return rt$ . 2. Convert dollars to soles today, invest in the Peruvian risk-free asset, and convert back to dollars using a forward co

  4. Slide 4: Uncovered Interest Parity (UIP)

    Uncovered Interest Parity (UIP) • Risky alternative: Convert dollars to soles today, invest in the Peruvian risk-free asset, and convert back to dollars at t + 1. • The log return on this strategy is: rt + st+1 − st • UIP assumes this risky strategy earns the same return as holding dollars in expect

  5. Slide 5: Introducing DKZ (2024)

    Introducing DKZ (2024) • CIP deviations are large in emerging markets. Why? • The paper provides micro evidence from Peru showing that local intermediaries intermediate UIP strategies of international investors, who trade against UIP only through forwards. – Intermediaries earn a margin proportional

  6. Slide 6: A Risky Arbitrage Model

    A Risky Arbitrage Model Global investors take limited positions against UIP but only participate in the forward market. (Wording: I wouldn’t label this “Speculative trading,” the core mechanism fits into the risky arbitrage literature, e.g., DeLong, Shleifer, Summers, Waldmann (1990)) 6 / 16

  7. Slide 7: Why Don't CIP/UIP Hold in DKZ?

    Why Don’t CIP/UIP Hold in DKZ? • CIP: rt − rt$ = −(ft − st ) Why it doesn’t hold: – Global investors: Restricted to forward markets; cannot access local bond or spot markets directly. – Local intermediaries: Constrained by regulatory limits on open positions and balance sheet costs. – Result: CIP de

  8. Slide 8: Local Dollar Demand Shock

    Local Dollar Demand Shock • Suppose exogenous increase in spot dollar demand from inelastic investors • Impact on UIP: Currency spot traders (CSTs) absorb dollar demand – CSTs sell dollars (supply more) by taking longer positions in local currency. – They require higher risk compensation: UIP deviat

  9. Slide 9: Local Dollar Demand Shock

    Local Dollar Demand Shock • Spot market: Demand for dollar spot moves right as inelastic investors demand more dollars: UIP deviations ↑. • Forward market: Demand for dollar forwards moves left as global investors reduce forward demand: CIP deviations ↓. 9 / 16

  10. Slide 10: Global Risk Appetite Shock

    Global Risk Appetite Shock • UIP initially positive. Increase in global risk aversion → Global investors reduce their local exposure → Demand curve for dollars forward moves to the right. • Less speculative pressure against UIP deviation → Demand curve for dollars spot moves to the right. 10 / 16

  11. Slide 11: Model Discussion

    Model Discussion • The model is very simple: a two-market equilibrium. – Exposition could be further simplified (see details below). • Simplicity often aligns with truth. • Some intuition seems lost in the log-linearisation. – E.g., an increase in risk aversion should flatten the demand for dollar f

  12. Slide 12: CIP Deviations and the Dollar

    CIP Deviations and the Dollar • USD appreciates in bad times. For example: change in real exchange rate = ai − |{z} 0.41 ∆VIXt + εi,t (0.11) (Source: Dahlquist, Heyerdahl-Larsen, Pavlova, and Pénasse, 2024) • DKZ additionally find that CIP deviations ↓ for emerging markets. – Caveat: probably less

  13. Slide 13: Misc Comments: Empirics

    Misc Comments: Empirics • External validity beyond Peru: Additional information on whether similar frictions exist in other emerging markets would strengthen the paper. • The 4% fee for buying Central Bank certificates of deposit after 2008—can you test your predictions using data from before 2008?

  14. Slide 14: Comments to the Author: Suggestions for Tidying Up the Model Section

    Comments to the Author: Suggestions for Tidying Up the Model Section • The general model overcomplicates notation. Start with a simplified version of the model. • Time: Use a two-period framework (e.g., t = 1, 2). Clarify where a continuum of agents or currencies is necessary. • Fix notation: Clearl

  15. Slide 15: Conclusion

    Conclusion • Detailed evidence from Peru shows: – Local intermediaries’ forward balances closely track foreign customers’ positions. – Global investors do not participate in spot markets, while local intermediaries and CSTs adjust their strategies to absorb shocks. – CIP and UIP deviations are negat

  16. Slide 16: Bonus: Dollar-Pound CIP deviations: 1870-2003

    Bonus: Dollar-Pound CIP deviations: 1870-2003 Source: The figure plots annual averages of monthly dollar-pound covered interest rate differentials. Source: Obstfeld, Maurice, and Alan M. Taylor, “Globalization and Capital Markets.” In Globalization in Historical Perspective, edited by M. D. Bordo, A

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