'Fool Me Once...' Did U.S. Investors Play It Safer in the European Debt Crisis?

46 Pages Posted: 7 Dec 2013

See all articles by Carol C. Bertaut

Carol C. Bertaut

Board of Governors of the Federal Reserve System

Fang Cai

Federal Reserve Board

Nyssa Kim

Federal Reserve Board

Date Written: October 11, 2013

Abstract

This paper examines U.S. investors’ portfolio investment patterns since the global financial crisis, particularly since the European debt crisis that began in late 2009. The global financial crisis during 2007-2009 was accompanied by an increase in U.S. investors’ home bias. U.S. investors experienced significant valuation losses and pulled back notably from their foreign investment, especially from foreign debt. In contrast, while they have also incurred sizable losses on cross-border investment during the European debt crisis, U.S. investors so far have not shown any increase in home bias, and they have not even pulled back from their long-term investments in Europe. Holdings data show that U.S. investors have continued to invest in European securities, particularly in government debt, but have made little new investment in the financial sector. This continued interest in European securities could owe to the fact that most of U.S. holdings of European debt have been concentrated in dollar-denominated debt issued by core euro area countries and the United Kingdom, which are deemed relatively safe. Changes in the composition of holdings over the past couple years suggest that U.S. investors have behaved in a way that reflects their diversity and differing objectives: while investors reached for higher yields in government debt, there also appears to be some shift toward safer investment in the financial sector.

Keywords: Cross-border investment, financial crisis, portfolio allocation, home bias

JEL Classification: F3, G1

Suggested Citation

Bertaut, Carol C. and Cai, Fang and Kim, Nyssa, 'Fool Me Once...' Did U.S. Investors Play It Safer in the European Debt Crisis? (October 11, 2013). FRB International Finance Discussion Paper No. 1088. Available at SSRN: https://ssrn.com/abstract=2364045 or http://dx.doi.org/10.2139/ssrn.2364045

Carol C. Bertaut (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th and C Streets, NW
Washington, DC 20551
United States

Fang Cai

Federal Reserve Board ( email )

Office of Financial Stability Policy and Research
1801 K St NW
Washington, DC 20551
United States
202-452-3540 (Phone)
202-263-4850 (Fax)

Nyssa Kim

Federal Reserve Board ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States
202-452-2345 (Phone)

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