Global Bond Portfolios and Emu

Abstract

We examine the bilateral composition of international bond portfolios for the euro area and the individual EMU member countries. We find considerable support for euro area bias: EMU member countries disproportionately invest in one another relative to other country pairs. Another striking pattern is the positive connection between trade linkages and financial linkages in explaining asymmetries across EMU member countries in terms of their outward bond investments vis-a-vis external counterparties. Our empirical results underline the impact of currency union on financial integration and support the notion that financial regionalization is the leading force underlying financial globalization.