Currency Bias of Sovereign Wealth Fund Investments

Heeho Kim (), Sanguk Kwon and Youn Seol
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Sanguk Kwon: Korea Rural Economic Institute
Youn Seol: Kyungpook National University

Korean Economic Review, 2022, vol. 38, 415-443

Abstract: This study provides an alternative explanation for the poor performance of sovereign wealth fund (SWF) investments based on key currency bias. Using the international portfolio rebalancing model and the matched firm data of 18,704 and 8,267 cases of SWFs’ cross-border investment during 1999–2017, evidence strongly supports the key currency bias hypothesis for the determination of SWFs’ cross-border investments. In sharp contrast to the relationship between the exchange rate and international portfolio flows, the economic rationale for the currency bias is to provide hedging against the exchange risk of SWFs’ crossborder investments by matching the denominated key currency of the SWF sources with the other denominated currency of foreign target assets. This study complements the existing finance literature by providing portfolio implications for analyzing cross-border investments by commercial institution investors and portfolio rebalancing of financial assets between different currency zones.

Keywords: Sovereign Wealth Fund (SWF); Foreign Bias; Currency Bias; Risk; Hedging (search for similar items in EconPapers)
JEL-codes: F21 F31 G15 (search for similar items in EconPapers)
Date: 2022
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