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Currency matters: Analyzing international bond portfolios

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  • Burger, John D.
  • Warnock, Francis E.
  • Warnock, Veronica Cacdac

Abstract

Bonds denominated in the investor's currency are special. We show this indirectly in a global dataset of bilateral bond holdings—indirectly because the global holdings dataset does not differentiate by currency denomination—and then more directly in datasets of US holdings of foreign bonds that do differentiate by currency. We find that the share of a country's bonds denominated in investors' currencies is an important determinant of the amount of cross-border investment it receives; factors associated with greater (or less) cross-border investment in bonds differ by currency denomination; and one phenomenon of international portfolios—the ever-present home bias—in some cases actually disappears when bonds are denominated in the investor's currency, suggesting that the home bias is to some extent a home currency bias.

Suggested Citation

  • Burger, John D. & Warnock, Francis E. & Warnock, Veronica Cacdac, 2018. "Currency matters: Analyzing international bond portfolios," Journal of International Economics, Elsevier, vol. 114(C), pages 376-388.
  • Handle: RePEc:eee:inecon:v:114:y:2018:i:c:p:376-388
    DOI: 10.1016/j.jinteco.2018.08.001
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    Cited by:

    1. Burger, John D. & Warnock, Francis E. & Warnock, Veronica Cacdac, 2018. "Currency matters: Analyzing international bond portfolios," Journal of International Economics, Elsevier, vol. 114(C), pages 376-388.
    2. Eugenia Andreasen & Martin Schindler & Patricio Valenzuela, 2019. "Capital Controls and the Cost of Debt," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 67(2), pages 288-314, June.
    3. Bekaert, Geert & De Santis, Roberto A., 2020. "Risk and return in international corporate bond markets," Working Paper Series 2452, European Central Bank.
    4. Sakai Ando, 2019. "International Financial Connection and Stock Return Comovement," IMF Working Papers 19/181, International Monetary Fund.
    5. Galstyan, Vahagn & Mehigan, Caroline & Mercado, Rogelio, 2020. "The currency composition of international portfolio assets," Journal of International Money and Finance, Elsevier, vol. 103(C).
    6. Leo de Haan & Robert Vermeulen, 2018. "The impact of sovereign debt ratings on euro area cross-border holdings of euro area sovereign debt," DNB Working Papers 620, Netherlands Central Bank, Research Department.
    7. Martijn Boermans & John Burger, 2020. "Global and local currency effects on euro area investment in emerging market bonds," DNB Working Papers 676, Netherlands Central Bank, Research Department.
    8. Gordon Y. Liao, 2019. "Credit Migration and Covered Interest Rate Parity," International Finance Discussion Papers 1255, Board of Governors of the Federal Reserve System (U.S.).
    9. Belke, Ansgar & Volz, Ulrich, 2018. "Capital flows to emerging market and developing economies: global liquidity and uncertainty versus country-specific pull factors," Discussion Papers 23/2018, German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE).
    10. Opie, Wei & Riddiough, Steven J., 2020. "Global currency hedging with common risk factors," Journal of Financial Economics, Elsevier, vol. 136(3), pages 780-805.
    11. Ogrokhina, Olena & Rodriguez, Cesar M., 2019. "The effect of inflation targeting and financial openness on currency composition of sovereign international debt," Journal of International Money and Finance, Elsevier, vol. 97(C), pages 1-18.
    12. Martijn Boermans & Robert Vermeulen, 2018. "Quantitative easing and preferred habitat investors in the euro area bond market," DNB Working Papers 586, Netherlands Central Bank, Research Department.

    More about this item

    Keywords

    Home bias; International bonds; International investment;

    JEL classification:

    • F3 - International Economics - - International Finance
    • G1 - Financial Economics - - General Financial Markets

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