Fickle emerging market flows, stable euros, and the dollar risk factor

Martijn A. Boermans and John Burger

Journal of International Economics, 2023, vol. 142, issue C

Abstract: Policymakers fear the 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. Employing granular data, we discern important investor differentiation by currency denomination and issuer-level risk factors. First, euro area investors exhibit a home currency bias leading to both strong cross-sectional preference and more stable flows to EUR-denominated bonds over time. Second, volatile flows to USD and local-currency-denominated bonds are robustly related to global risk factors including the broad dollar. Investors differentiate among USD-denominated bonds such that flows to currency mismatched (and less creditworthy) sovereigns and corporates are more sensitive to the broad dollar. In contrast, local currency bond investors appear primarily concerned with currency rather than issuer-specific credit risk.

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: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Working Paper: Fickle Emerging Market Flows, Stable Euros, and the Dollar Risk Factor (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:inecon:v:142:y:2023:i:c:s0022199623000168

DOI: 10.1016/j.jinteco.2023.103730

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