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Currency Matters: Analyzing International Bond Portfolios

Listed author(s):
  • John D. Burger
  • Francis E. Warnock
  • Veronica Cacdac Warnock
Registered author(s):

    Currency denomination is a prominent feature in the analysis of the structure of international bond markets, but is largely absent from analyses of cross-border investment in debt securities. This omission owes in part to the limitations of widely used datasets such as the IMF’s CPIS data (on positions) and its BOP data (on flows): Neither identifies the currency denomination of the underlying bonds and both combine in a single data point bonds of various currencies. In this paper we show that 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 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 strong evidence that 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.

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    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 23175.

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    Date of creation: Feb 2017
    Handle: RePEc:nbr:nberwo:23175
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    1. John H. Rogers & Chiara Scotti & Jonathan H. Wright, 2014. "Evaluating asset-market effects of unconventional monetary policy: a multi-country review," Economic Policy, CEPR;CES;MSH, vol. 29(80), pages 749-799, October.
    2. Fratzscher, Marcel, 2011. "Capital Flows, Push versus Pull Factors and the Global Financial Crisis," CEPR Discussion Papers 8496, C.E.P.R. Discussion Papers.
    3. Hale, Galina B. & Spiegel, Mark M., 2012. "Currency composition of international bonds: The EMU effect," Journal of International Economics, Elsevier, vol. 88(1), pages 134-149.
    4. Chuhan, Punam & Claessens, Stijn & Mamingi, Nlandu, 1998. "Equity and bond flows to Latin America and Asia: the role of global and country factors," Journal of Development Economics, Elsevier, vol. 55(2), pages 439-463, April.
    5. Morris Goldstein & Philip Turner, 2004. "Controlling Currency Mismatches in Emerging Markets," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 373, 03.
    6. John D. Burger & Rajeswari Sengupta & Francis E. Warnock & Veronica C. Wrnock, 2015. "U.S. Investment in global bonds: As the fed pushes, some EMEs pull," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2015-002, Indira Gandhi Institute of Development Research, Mumbai, India.
    7. Alberto Felettigh & Paola Monti, 2008. "How to interpret the CPIS data on the distribution of foreign portfolio assets in the presence of sizeable cross-border positions in mutual funds. Evidence for Italy and the main euro-area countries," Questioni di Economia e Finanza (Occasional Papers) 16, Bank of Italy, Economic Research and International Relations Area.
    8. Fidora, Michael & Fratzscher, Marcel & Thimann, Christian, 2006. "Home bias in global bond and equity markets: the role of real exchange rate volatility," Working Paper Series 0685, European Central Bank.
    9. John D. Burger & Francis E. Warnock, 2006. "Foreign Participation in Local Currency Bond Markets," NBER Working Papers 12548, National Bureau of Economic Research, Inc.
    10. Lane, Philip R. & Milesi-Ferretti, Gian Maria, 2004. "International Investment Patterns," CEPR Discussion Papers 4499, C.E.P.R. Discussion Papers.
    11. John D. Burger & Francis E. Warnock, 2006. "Local Currency Bond Markets," IMF Staff Papers, Palgrave Macmillan, vol. 53(si), pages 1-7.
    12. Philip R. Lane, 2006. "Global Bond Portfolios and EMU," The Institute for International Integration Studies Discussion Paper Series iiisdp168, IIIS.
    13. Hali J. Edison & Francis E. Warnock, 2004. "U.S. Investors' Emerging Market Equity Portfolios: A Security-Level Analysis," The Review of Economics and Statistics, MIT Press, vol. 86(3), pages 691-704, August.
    14. Stijn Claessens & Daniela Klingebiel & Sergio L. Schmukler, 2007. "Government Bonds in Domestic and Foreign Currency: the Role of Institutional and Macroeconomic Factors," Review of International Economics, Wiley Blackwell, vol. 15(2), pages 370-413, 05.
    15. Branimir Gruic & Philip Wooldridge, 2012. "Enhancements to the BIS debt securities statistics," BIS Quarterly Review, Bank for International Settlements, December.
    16. Wenxin Du & Jesse Schreger, 2016. "Sovereign Risk, Currency Risk, and Corporate Balance Sheets," Harvard Business School Working Papers 17-024, Harvard Business School.
    17. van Wincoop, Eric & Warnock, Francis E., 2010. "Can trade costs in goods explain home bias in assets?," Journal of International Money and Finance, Elsevier, vol. 29(6), pages 1108-1123, October.
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