Expectativas cambiarias, selección adversa y liquidez: Exchange expectations, adverse selection and liquidity

Jimmy Melo

doi:10.29105/ensayos33.1-2

Authors

Jimmy Melo El Colegio de México (COLMEX), Centro de Estudios Económicos

DOI:

https://doi.org/10.29105/ensayos33.1-2

Keywords:

Technical Analysis, Adverse Selection, Exchange Rate Expectations, Market Liquidity, Mechanism Design, Government Direct Lending

Abstract

This paper evaluates the short-term implications of exchange rate expectations in credit markets affected by adverse selection. It presents a model for a credit market in which debt contracts are contingent on the income of borrowers. Since legacy assets are denominated in a foreign currency, contracts are written using these expectations based on the premises of technical analysis. In this model, the adverse exchange rate trend generates public signals which can move the market from one equilibrium, where all firms invest, to another, where only a fraction do, which defines the space for government intervention. Thus, from a policy perspective; if the government wants to restore the credit market by using direct lending programs such as the discount window, it has to increase the size of the program. Otherwise, an overreaction in the interest rate could dry up liquidity and prevent firms from investing.

Downloads

Download data is not yet available.

Author Biography

Jimmy Melo, El Colegio de México (COLMEX), Centro de Estudios Económicos

El Colegio de México. Centro de Estudios Económicos. Dirección: Camino al Ajusco 20, Col. Pedregal de Santa Teresa, 10740, México DF, México.

References

Aghion, P., Bolton, P. y Fries, S. (1999). “Optimal Design of Bank Bailouts: The Case of Transition Economies”. Journal of Institutional and Theoretical Economics, 155(1), 51–70.

Aghion, P., Bolton, P. y Tirole, J. (2004). “Exit Options in Corporate Finance: Liquidity versus Incentives”. Review of Finance, 8(3), 327–53. DOI: https://doi.org/10.1007/s10679-004-2542-0

Akerlof, G. A. (1970). “The Market for ‘Lemons’: Quality Uncertainty and the Market Mechanism”. Quarterly Journal of Economics, 84(3), 488–500. DOI: https://doi.org/10.2307/1879431

Allen, F. y Carlleti, E. (2008). “The Role of Liquidity in Financial Crises”. Paper presented at Federal Reserve of Kansas City Economic Policy Symposium: Maintaining Stability in a Changing Financial System. Jackson Hole, WY.

Allen, H. y Taylor, M. P. (1990). “Charts, noise and fundamentals in the London foreign exchange market”. Economic Journal, 100(supplement), 49–59. DOI: https://doi.org/10.2307/2234183

Allen, H. y Taylor, M. P. (1992). “The use of technical analysis in the foreign exchange market”. Journal of International Money and Finance, 11(3), 304–314. DOI: https://doi.org/10.1016/0261-5606(92)90048-3

Amato, J. y Shin H. S. (2003). “Public and private information in monetary policy models”. BIS Working Papers No. 138. DOI: https://doi.org/10.2139/ssrn.794568

Arregui, N. (2010). “Signaling Concerns, Discount Window Borrowing and Competing Liquidity Facilities”. MIT Working Paper 5785.

Bauer, C. y Herz, B. (2003). “Noise traders and the volatility of exchange rates”. Univ. Rechts-und Wirtschaftswiss. Fak.

Bullow, J. y Rogoff, K. (1989). “Sovereign Debt: Is to Forgive to Forget?”. The American Economic Review, 79(1), 43-50.

Calomiris, C. W. y Gorton, G. (1991). “The origins of banking panics: models, facts, and bank regulation”. En Hubbard, G. (Ed.), Financial markets and financial crises (109-174). University of Chicago Press.

Chari, V. V. (1989). “Banking without Deposit Insurance or Bank Panics: Lessons from a Model of the U.S. National Banking System”. Federal Reserve Bank of Minneapolis Quarterly Review, 13(3), 3–19. DOI: https://doi.org/10.21034/qr.1331

Corbett, J. y Mitchell, J. (2000). “Banking Crises and Bank Rescues: The Effect of Reputation”. Journal of Money, Credit, and Banking, 32(3), 474–512. DOI: https://doi.org/10.2307/2601192

De Grauwe, P. y Grimaldi, M. (2006). The Exchange Rate in a Behavioral Finance Framework. New Jersey, US: Princeton University Press. DOI: https://doi.org/10.1515/9780691186993

De Long, J. B., Shleifer, A., Summers, L. y Waldmann, R. (1990). “Noise Trader Risk in Financial Markets”. Journal of Political Economy, 98(4), 703–738. DOI: https://doi.org/10.1086/261703

DeMarzo, P. y Duffie, D. (1999). “A Liquidity-Based Model of Security Design”. Econometrica, 67(1), 65–99. DOI: https://doi.org/10.1111/1468-0262.00004

Diamond, D. W. y Dybvig, P. H. (1983). “Bank Runs, Deposit Insurance, and Liquidity”. Journal of Political Economy, 91(3), 401–19. DOI: https://doi.org/10.1086/261155

Diamond, D. W. y Rajan R. G. (2005). “Liquidity Shortages and Banking Crises”. Journal of Finance, 60(2), 615–47. DOI: https://doi.org/10.1111/j.1540-6261.2005.00741.x

Duffie, D. (2010). “The Failure Mechanics of Dealer Banks”. Journal of Economic Perspectives, 24(1), 51–72. DOI: https://doi.org/10.1257/jep.24.1.51

Evans, M. y Lyons, R. (2002). “Order Flow and Exchange Rate Dynamics”. Journal of Political Economy, 110(1), 170–180. DOI: https://doi.org/10.1086/324391

Faure-Grimaud, A. y Gromb, D. (2004). “Public Trading and Private Incentives”. Review of Financial Studies, 17(4), 985–1014. DOI: https://doi.org/10.1093/rfs/hhh002

Fishman, M. J. y Parker, J. A. (2012). “Valuation, Adverse Selection, and Market Collapses”. NBER Working Paper No. 18358. DOI: https://doi.org/10.3386/w18358

Frankel, J. A. y Froot, K. A. (1986). “Understanding the US dollar in the eighties: the expectations of chartists and fundamentalists”. Economic Record, 62(supplement), 24–38.

Frankel, J. A. y Froot, K. A.(1988). “Chartists, fundamentalists and the demand for dollars”. NBER Reprint 1655, 73–126.

Frankel, J. A. y Froot, K. A. (1990). “Chartists, fundamentalists, and trading in the foreign exchange market”. The American Economic Review, 80(2), 181-185.

Goyal, A. (2006). “Exchange Rate Regimes: Middling Through”. Global Economic Review: Perspectives on East Asian Economies and Industries, 35(2), 153-175. DOI: https://doi.org/10.1080/12265080600715335

Gorton, G. (2009). “Information, Liquidity, and the (Ongoing) Panic of 2007”. NBER Working Paper No. 14649. DOI: https://doi.org/10.3386/w14649

Hau, H. (1998). “Competitive Entry and Endogenous Risk in the Foreign Exchange Market”. Review of Financial Studies, 11, 757–788. DOI: https://doi.org/10.1093/rfs/11.4.757

Heider, F., Hoerova, M. y Holthausen, C. (2008). “Liquidity Hoarding and Interbank Market Spreads: The Role of Counterparty Risk”. European Central Bank, Working Paper 1126. DOI: https://doi.org/10.2139/ssrn.1343606

Jeanne, O. y Rose, A. K. (2002). “Noise Trading and Exchange Rate Regimes”. Quarterly Journal of Economics, 117(2): 537–569. DOI: https://doi.org/10.1162/003355302753650328

Jegadeesh, N. y Titman, S. (2001). “Profitability of Momentum Strategies: An Evaluation of Alternative Explanations”. The Journal of Finance, 56(2), 699-720. DOI: https://doi.org/10.1111/0022-1082.00342

Jongen, R., Verschoor, W. F. C. y Wolff, C. C. P. (2008). “Foreign Exchange Rate Expectations: Survey and Synthesis”. Journal of Economic Surveys, 22(1), 140–165. DOI: https://doi.org/10.1111/j.1467-6419.2007.00523.x

Jorion, P. (1990). “The Exchange-Rate Exposure of U.S. Multinationals”. The Journal of Business, 63(3), 331-345. DOI: https://doi.org/10.1086/296510

Kilian, L. y Taylor, M. (2001). “Why is it so Difficult to Beat the Random Walk Forecast of Exchange Rates?”. Gerald R. Ford School of Public Policy Working Paper r 464. DOI: https://doi.org/10.2139/ssrn.356266

Levy, R. (1966). “Conceptual Foundations of Technical Analysis”. Financial Analysts Journal, 22(4), 83-89. DOI: https://doi.org/10.2469/faj.v22.n4.83

Landier, A. y Ueda, K. (2009). “The Economics of Bank Restructuring: Understandingthe Options”. International Monetary Fund, Staff Position Note 09/12, 1–39. DOI: https://doi.org/10.5089/9781462337422.004

Mankiw, G. (1986). “The allocation of credit and Financial Collapse.” Quarterly Journal of Economics, 101, 455–470. DOI: https://doi.org/10.2307/1885692

Mitchell, J. (2001). “Bad Debts and the Cleaning of Banks' Balance Sheets: An Application to Transition Economies”. Journal of Financial DOI: https://doi.org/10.1006/jfin.2000.0304

Intermediation, 10(1), 1-27.

Minelli, E. y Modica, S. (2009). “Credit Market Failures and Policy”. Journal of PublicEconomic Theory, 11(3), 363–82. DOI: https://doi.org/10.1111/j.1467-9779.2009.01414.x

Mishkin, F. S. (1991). Asymmetric information and financial crises: a historical perspective. NBER Working Paper No. 3400. DOI: https://doi.org/10.3386/w3400

Myers, S. C. y Majluf, N. S. (1984). “Corporate financing and investment decisions when firms have information that investors do not have”. Journal of financial economics, 13, 187-221. DOI: https://doi.org/10.1016/0304-405X(84)90023-0

Nachman, D. C. y Noe., T. H. (1994). “Optimal Design of Securities under Asymmetric Information”. Review of Financial Studies, 7(1), 1–44. DOI: https://doi.org/10.1093/rfs/7.1.1

Papaioannou, M. (2006). “Exchange Rate Risk Measurement and Management: Issues and Approaches for Firms”. South-Eastern Europe Journal of Economics, 2, 129–146. DOI: https://doi.org/10.2139/ssrn.947372

Peristiani, S. (1998). “The Growing Reluctance to Borrow at the Discount Window: An Empirical Investigation”. Review of Economics and Statistics, 80(4), 611–20. DOI: https://doi.org/10.1162/003465398557690

Philippon, T. (2010). “Debt Overhang and Recapitalization in Closed and Open Economies”. IMF Economic Review, 58(1), 157-178. DOI: https://doi.org/10.1057/imfer.2010.3

Philippon, T. y Skreta, V. (2012). “Optimal Interventions in Markets with Adverse Selection”. American Economic Review, 102 (1), 1–28. DOI: https://doi.org/10.1257/aer.102.1.1

Philippon, T. y Schnabl, P. (2009). “Efficient Recapitalization”. National Bureau of Economic Research Working Paper No. 14929. DOI: https://doi.org/10.3386/w14929

Rochet, J. y Stole, L. (2002). “Nonlinear Pricing with Random Participation”. Review of Economic Studies, 69, 277–311. DOI: https://doi.org/10.1111/1467-937X.00206

Stiglitz, J. y Weiss, A. (1981). “Credit Rationing in Markets with Imperfect Information”. American Economic Review, 71(3), 393–410.

The Economist Newspaper (2012). “International trade: Boxed in Global trade has turned down sharply this year. The outlook is pretty bleak, too.”September 8.Disponible en: http://www.economist.com/node/21562221

Tirole, J. (2012). “Overcoming Adverse Selection: How Public Intervention Can Restore Market Functioning”. American Economic Review, 102 (1), 29–59. DOI: https://doi.org/10.1257/aer.102.1.29