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Currency Bias of Sovereign Wealth Fund Investments

Author

Listed:
  • Heeho Kim

    (Kyungpook National University)

  • Sanguk Kwon

    (Korea Rural Economic Institute)

  • Youn Seol

    (Kyungpook National University)

Abstract

This study provides an alternative explanation for the poor performance of sovereign wealth fund (SWF) investments based on key currency bias. Using the international portfolio rebalancing model and the matched firm data of 18,704 and 8,267 cases of SWFs’ cross-border investment during 1999–2017, evidence strongly supports the key currency bias hypothesis for the determination of SWFs’ cross-border investments. In sharp contrast to the relationship between the exchange rate and international portfolio flows, the economic rationale for the currency bias is to provide hedging against the exchange risk of SWFs’ crossborder investments by matching the denominated key currency of the SWF sources with the other denominated currency of foreign target assets. This study complements the existing finance literature by providing portfolio implications for analyzing cross-border investments by commercial institution investors and portfolio rebalancing of financial assets between different currency zones.

Suggested Citation

  • Heeho Kim & Sanguk Kwon & Youn Seol, 2022. "Currency Bias of Sovereign Wealth Fund Investments," Korean Economic Review, Korean Economic Association, vol. 38, pages 415-443.
    • Handle: RePEc:kea:keappr:ker-20220701-38-3-03
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    References listed on IDEAS

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    More about this item

    Keywords

    Sovereign Wealth Fund (SWF); Foreign Bias; Currency Bias; Risk; Hedging;
    All these keywords.

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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