2026 Theses Doctoral

Essays in International Finance and Macroeconomics

Chen, Nanyu

This dissertation studies topics in international finance and macroeconomics. In the first chapter, Currency Risk Management in Emerging Markets, we examine how major global investors manage their currency risk in emerging markets using foreign exchange (FX) derivatives. Using contract-level data on U.S. bond funds’ currency forward positions from 2010–2023, we document that foreign investors dedicated to emerging markets (EM) on average amplify their EM currency exposure by 15% through net long position in offshore forwards linked to onshore bond positions, and even more when including forwards without corresponding bond investments. Based on extensive cross-sectional, time-series, and event-study analysis, we find that this offshore forward usage pattern is strongly related to the degree of capital control imposed by currency issuers, underpinned by a triangular relationship between capital flow restrictions, funds' bond portfolio deviations from local currency benchmark weights, and net forward purchases. We find substantial differences in currency hedger funds and speculator funds. Bond portfolio weights strongly predict forward sales for funds that primarily hedge, but less so for funds that speculate, consistent with an inelastic hedging demand tied to bond investment.

In the second chapter, An Equilibrium Model of EM Offshore Forward Market, we develop an equilibrium model of the offshore forward market featuring investor heterogeneity, capital flow restrictions and forward market segmentation to rationalize empirical properties of the forward premia of EM currencies. Evidence related to currency hedging pattern, currency wedges and their movement during risk-off events corroborate model predictions. Moreover, focusing on the currency forward market equilibrium, we characterize the dependence of currency hedging cost on the cost of accessing the bond market or intermediating offshore forward trades. We find evidence supporting our model predictions: while tighter capital flows restrictions lower equilibrium hedging cost, greater forward market segmentation pushes up the hedging cost.

In the third chapter, From Banks to Nonbanks: Macroprudential and Monetary Policy Effects on Corporate Lending, we study the implications of the growing role of nonbanks in corporate credit intermediation for the transmission of macroprudential policy (MaPP) and monetary policy (MP) to the real economy. Using syndicated loan data, we analyze the effects of MaPP and MP shocks within a unified framework, allowing for a better identification of the effect of each policy shock compared to studies that consider one shock in isolation. We find that nonbanks act as shock absorbers, cushioning nonfinancial firms from both MaPP and MP
tightening. These shocks drive credit away from weaker banks toward nonbanks, raising concerns about credit quality. Our findings highlight that the side effects of tighter MaPP and MP are non-trivial as credit intermediation migrates to a sector largely outside the regulatory perimeter, posing new financial stability risks.