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Global and local currency effects on euro area investment in emerging market bonds

Martijn Boermans and John Burger

DNB Working Papers from Netherlands Central Bank, Research Department

Abstract: We analyze how global and local factors affect portfolio allocation by euro area investors in emerging markets at the bond-level. First, cross-sectional analysis reveals a strong preference for home (Euro) currency bonds. Second, panel regressions, whether at the bond or aggregate flows level, consistently identify trade-weighted US dollar fluctuations as the most robust explanatory variable, in sharp contrast to other global factors, such as the VIX and Fed or ECB monetary policy, which have much less impact on reallocations to emerging market bonds. Our results are consistent with the notion that broad US dollar movements act as a barometer for global risk appetite, but with an important caveat: Throughout our analysis we find holdings in Euro-denominated bonds are less sensitive to global factors, which we interpret as further evidence of a home currency bias.

Keywords: global risk; capital flows; global financial cycle; US dollar; foreign exchange rates; portfolio choice; emerging economies; spillovers; monetary policy; securities holdings statistics (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
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Persistent link: https://EconPapers.repec.org/RePEc:dnb:dnbwpp:676

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