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Which exchange rate matters to global investors?

Author

Listed:
  • Kristy Jansen
  • Hyun Song Shin
  • Goetz von Peter

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.

Suggested Citation

  • Kristy Jansen & Hyun Song Shin & Goetz von Peter, 2024. "Which exchange rate matters to global investors?," BIS Working Papers 1210, Bank for International Settlements.
    • Handle: RePEc:bis:biswps:1210
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    References listed on IDEAS

    as
    1. Stefan Avdjiev & Wenxin Du & Cathérine Koch & Hyun Song Shin, 2019. "The Dollar, Bank Leverage, and Deviations from Covered Interest Parity," American Economic Review: Insights, American Economic Association, vol. 1(2), pages 193-208, September.
    2. Roberto Chang & Andres Velasco, 2001. "A Model of Financial Crises in Emerging Markets," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 116(2), pages 489-517.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Currency mismatch; balance sheet effects; emerging markets; exchange rates; institutional investors; sovereign bonds;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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