Which exchange rate matters to global investors?

Kristy Jansen, Hyun Song Shin and Goetz von Peter ()

No 1210, BIS Working Papers from Bank for International Settlements

Abstract: How do exchange rates affect the asset allocation of bond portfolio investors? Using detailed security-level holdings, we find that euro area-based investors systematically shed sovereign bonds as the dollar strengthens, confirming the role of the dollar as a global risk factor even for euro-based investors. More distinctively, they also shed local currency bonds when the euro strengthens, due to currency mismatches on their own balance sheets. There is no such effect for foreign currency bonds of the same sovereign issuers. These findings are consistent with a Value-at-Risk portfolio choice model that brings out separate roles for local, foreign and reference currencies.

Keywords: Currency mismatch; balance sheet effects; emerging markets; exchange rates; institutional investors; sovereign bonds (search for similar items in EconPapers)
JEL-codes: F31 G11 G15 G23 (search for similar items in EconPapers)
Date: 2024-09
New Economics Papers: this item is included in nep-eur, nep-fmk, nep-ipr, nep-mon and nep-opm
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