Global and Local Currency Effects on Euro Area Investment in Emerging Market Bonds

49 Pages Posted: 18 Mar 2020

See all articles by Martijn Adriaan Boermans

Martijn Adriaan Boermans

De Nederlandsche Bank; Utrecht University - School of Economics

John D. Burger

Loyola University Maryland - Department of Economics

Date Written: March 16, 2020

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: [comma seglobal risk, capital flows, global financial cycle, US dollar, foreign exchange rates, portfolio choice, emerging economies, spillovers, monetary policy, securities holdings statisticsparated]

JEL Classification: E52, F21, F3, F31, F32, G11, G15

Suggested Citation

Boermans, Martijn Adriaan and Burger, John D., Global and Local Currency Effects on Euro Area Investment in Emerging Market Bonds (March 16, 2020). De Nederlandsche Bank Working Paper No. 676, Available at SSRN: https://ssrn.com/abstract=3556419 or http://dx.doi.org/10.2139/ssrn.3556419

Martijn Adriaan Boermans (Contact Author)

De Nederlandsche Bank ( email )

PO Box 98
1000 AB Amsterdam
Amsterdam, 1000 AB
Netherlands

Utrecht University - School of Economics ( email )

Kriekenpitplein 21-22
Adam Smith Building
Utrecht, +31 30 253 7373 3584 EC
Netherlands

HOME PAGE: http://www.uu.nl/leg/staff/MABoermans/0

John D. Burger

Loyola University Maryland - Department of Economics ( email )

4501 N. Charles St
Baltimore, MD 21210
United States
410-617-5831 (Phone)
410-617-2118 (Fax)

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