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Granular Investors and International Bond Prices: Scarcity-Induced Safety

Author

Listed:
  • Faia, Ester
  • Salomao, Juliana
  • Ventula Veghazy, Alexia

Abstract

With a unique dataset of euro area corporate bonds we study the role of large heterogeneous investors’ demand on currency pricing. We docu- ment that while insurance and pension funds exhibit strong preferences for holding assets issued by local firms and denominated in home currency; mutual funds do not. Motivated by this segmentation, we estimate the impact of investor demand on euro-dollar return differentials (hedged and unhedged) for given security and issuer. These differentials decline as ECB asset purchases induce a drain in euro securities. A dynamic portfolio optimization model of bonds in different currencies, where heterogeneous risk-attitudes lead to UIP deviations and regulation to CIP ones, accounts for the facts.

Suggested Citation

  • Faia, Ester & Salomao, Juliana & Ventula Veghazy, Alexia, 2022. "Granular Investors and International Bond Prices: Scarcity-Induced Safety," CEPR Discussion Papers 17454, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:17454
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    More about this item

    JEL classification:

    • F3 - International Economics - - International Finance
    • G2 - Financial Economics - - Financial Institutions and Services
    • G4 - Financial Economics - - Behavioral Finance

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