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International Currencies and Capital Allocation

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  • Matteo Maggiori
  • Brent Neiman
  • Jesse Schreger

Abstract

We establish that global portfolios are driven by an often neglected aspect: the currency of denomination of assets. Using a dataset of $27 trillion in security-level investment positions, we demonstrate that investor holdings are biased toward their own currencies to such an extent that each country holds the bulk of all foreign debt securities denominated in their own currency. Surprisingly, currency is such a strong predictor of the nationality of a security's holder that the nationality of the issuer - to date, the most powerful predictor in a voluminous literature on cross-border portfolios - adds very little explanatory power. While large firms issue bonds in foreign currency and borrow from foreigners, the vast majority of firms issue only in local currency and do not directly access foreign capital. These patterns hold across countries with the exception of the US, which issues an international currency. The global willingness to hold US dollars means that even smaller US firms that borrow exclusively in dollars have little difficulty borrowing from abroad. Global portfolios shifted sharply away from the euro and toward the dollar after the 2008 financial crisis, further cementing the dollar's international role and potentially amplifying the benefit its status brings to the US.

Suggested Citation

  • Matteo Maggiori & Brent Neiman & Jesse Schreger, 2018. "International Currencies and Capital Allocation," NBER Working Papers 24673, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:24673
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    References listed on IDEAS

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    1. Fidora, Michael & Fratzscher, Marcel & Thimann, Christian, 2007. "Home bias in global bond and equity markets: The role of real exchange rate volatility," Journal of International Money and Finance, Elsevier, vol. 26(4), pages 631-655, June.
    2. Liliana Varela & Juliana Salomao, 2016. "Exchange Rate Exposure and Firm Dynamics," Working Papers 2016-278-05, Department of Economics, University of Houston.
    3. Ryan Chahrour & Rosen Valchev, 2017. "International Medium of Exchange: Privilege and Duty," Boston College Working Papers in Economics 934, Boston College Department of Economics.
    4. Diego Perez & Pablo Ottonello, 2016. "The Currency Composition of Sovereign Debt," 2016 Meeting Papers 596, Society for Economic Dynamics.
    5. Dmitry Mukhin, 2018. "An Equilibrium Model of the International Price System," 2018 Meeting Papers 89, Society for Economic Dynamics.
    6. Alan Spearot, 2016. "Unpacking the Long-Run Effects of Tariff Shocks: New Structural Implications from Firm Heterogeneity Models," American Economic Journal: Microeconomics, American Economic Association, vol. 8(2), pages 128-167, May.
    7. Robert Ready & Mariano Croce & Federico Gavazzoni & Riccardo Colacito, 2016. "Currency Risk Factors in a Recursive Multi-Country Economy," 2016 Meeting Papers 297, Society for Economic Dynamics.
    8. Gozzi, Juan Carlos & Levine, Ross & Martinez Peria, Maria Soledad & Schmukler, Sergio L., 2015. "How firms use corporate bond markets under financial globalization," Journal of Banking & Finance, Elsevier, vol. 58(C), pages 532-551.
    9. Kalok Chan & Vicentiu Covrig & Lilian Ng, 2005. "What Determines the Domestic Bias and Foreign Bias? Evidence from Mutual Fund Equity Allocations Worldwide," Journal of Finance, American Finance Association, vol. 60(3), pages 1495-1534, June.
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    Citations

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    Cited by:

    1. Liliana Varela & Juliana Salomao, 2016. "Exchange Rate Exposure and Firm Dynamics," Working Papers 2016-278-05, Department of Economics, University of Houston.
    2. 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.
    3. Robin Greenwood & Annette Vissing-Jorgensen, 2018. "The Impact of Pensions and Insurance on Global Yield Curves," Harvard Business School Working Papers 18-109, Harvard Business School, revised Dec 2018.
    4. Ramon Moreno & José María Serena Garralda, 2018. "Firms' credit risk and the onshore transmission of the global financial cycle," BIS Working Papers 712, Bank for International Settlements.
    5. Bruno, Valentina G. & Shin, Hyun Song, 2018. "Currency depreciation and emerging market corporate distress," CEPR Discussion Papers 13298, C.E.P.R. Discussion Papers.
    6. Zhengyang Jiang & Arvind Krishnamurthy & Hanno Lustig, 2018. "Foreign Safe Asset Demand and the Dollar Exchange Rate," NBER Working Papers 24439, National Bureau of Economic Research, Inc.
    7. Valentina Bruno & Hyun Song Shin, 2018. "Currency depreciation and emerging market corporate distress," BIS Working Papers 753, Bank for International Settlements.
    8. John Ammer & Alexandra Tabova & Caleb Wroblewski, 2018. "Searching for yield abroad: risk-taking through foreign investment in U.S. bonds," BIS Working Papers 687, Bank for International Settlements.
    9. 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.
    10. Nelson Camanho & Harald Hau & Hélène Rey, 2018. "Global Portfolio Rebalancing and Exchange Rates," NBER Working Papers 24320, National Bureau of Economic Research, Inc.
    11. Ricardo Sabbadini, 2018. "Overcoming the Original Sin: gains from local currency external debt," Working Papers Series 484, Central Bank of Brazil, Research Department.

    More about this item

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • F3 - International Economics - - International Finance
    • F5 - International Economics - - International Relations, National Security, and International Political Economy
    • G1 - Financial Economics - - General Financial Markets
    • G2 - Financial Economics - - Financial Institutions and Services

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