Fickle Emerging Market Flows, Stable Euros, and the Dollar Risk Factor

Martijn Boermans and John Burger

Working Papers from DNB

Abstract: Policymakers fear the potentially destabilizing impact of fickle global investors on emerging markets. Euro area investors are significant participants in emerging bond markets and exhibit volatile flows, but their fickleness does not result in indiscriminate periods of surge and flight. Instead, we find differentiation based on currency denomination and issuer-level risk factors. First, euro area investors exhibit a strong home currency bias that manifests itself both as a cross-sectional preference and in the form of relatively stable flows to Euro-denominated bonds over time. Second, volatile flows to USD and local-currency-denominated bonds are most robustly related to fluctuations in the broad dollar exchange rate. Investors differentiate among USD-denominated bonds based on balance sheet factors (and credit ratings) such that flows to currency mismatched (and less creditworthy) sovereigns and corporates are more sensitive to the broad dollar. In contrast, differentiation by issuer-level characteristics is less apparent for local currency bonds suggesting investors are primarily concerned with currency rather than issuer-specific credit risk for this asset class.

Keywords: global risk; capital flows; global financial cycle; US dollar; exchange rates; currency mismatch; portfolio choice; spillovers; emerging market bonds; securities holdings statistics; home currency bias (search for similar items in EconPapers)
JEL-codes: E52 F21 F3 F31 F32 G11 G15 (search for similar items in EconPapers)
Date: 2020-03
New Economics Papers: this item is included in nep-eec, nep-ifn, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Journal Article: Fickle emerging market flows, stable euros, and the dollar risk factor (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:dnb:dnbwpp:676

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