nep-ifn New Economics Papers
on International Finance
Issue of 2014‒03‒08
two papers chosen by
Vimal Balasubramaniam
University of Oxford

  1. Explaining Foreign Holdings of Asia’s Debt Securities By Horioka, Charles Yuji; Nomoto, Takaaki; Terada-Hagiwara, Akiko
  2. Corporate Foreign Currency Borrowing and Investment. The Case of Hungary By Marianna Endrész; Péter Harasztosi

  1. By: Horioka, Charles Yuji (School of Economics, University of the Philippines); Nomoto, Takaaki (Asian Development Bank); Terada-Hagiwara, Akiko (Asian Development Bank)
    Abstract: In this paper, we analyze data on trends since 2000 in foreign holdings of government securities and other debt securities, with emphasis on Japan and developing Asia. We find that foreign residents generally increased their holdings of Asian debt securities during the sample period and in particular during the post-global financial crisis (GFC) period. Meanwhile, foreign holdings of debt securities have been declining in the eurozone. Foreign holdings of short-term debt securities were very volatile during the GFC period (2009–11), with a sharp drop in foreign holdings of short-term Asian debt securities that was followed by a renewed surge. Our empirical analysis suggests that despite the increase in foreign holdings of debt securities its share is still far lower than the optimal portfolio warranted by the capital asset pricing market theory. In other words, foreign investors’ home bias is still strong. The overall increase in foreign holdings of Asian debt securities appears to be driven by relatively stable exchange rates and the higher risk-adjusted returns on the debt securities of the region. Additionally, we find that investors were more “home-biased” during the GFC period and invested less in the markets of the major industrialized economies.
    Keywords: Government debt; government securities; government bonds; government bills; government notes; debt securities; debt financing; debt holdings; foreign debt holdings; international capital flows; short-term capital movements; cross-border portfolio investments; safe haven; home bias; capital asset pricing model; optimal portfolios; global financial crisis; eurozone; Japan; developing Asia
    JEL: F32 F34 G15 O53
    Date: 2014–01–01
  2. By: Marianna Endrész (Magyar Nemzeti Bank (the central bank of Hungary)); Péter Harasztosi (Magyar Nemzeti Bank (the central bank of Hungary))
    Abstract: The paper investigates the impact of foreign currency lending in the Hungarian corporate sector on real investment. Using a rich micro dataset we consider two questions. First we test whether foreign currency (FX) lending – by lowering user cost and easing liquidity constraints – contributed to larger investment before the crisis. The second question focuses on balance sheet effects – whether the large domestic currency depreciation observed during the great recession resulted in lower investment rate for firms with foreign currency loans. We try to separate and measure both the competitiveness and balance sheet effect of depreciation. In order to answer these questions several methods are employed – OLS regression, regression enhanced with interaction-terms, and matching. The uniqueness of the paper lies in its almost full coverage in terms of firms and FX exposures, and the richness of the dataset. The results show that before the crisis FX lending increased investment rates. In addition, evidence is found on the liquidity easing channel being effective, i.e. the effect was larger in the case of smaller and non-traded firms. During the crisis the investment rate of firms with FX loans declined more because of balance sheet effects triggered by the depreciation. More liquidity constrained firms suffered more. On the other hand, the evidence on the competitiveness effect is weaker and less robust. Although one would expect that the effect of the exchange rate is non-linear and heterogeneous, the more general non-parametric approach (matching) yields estimates that do not statistically differ from the simple linear regression coefficients.
    Keywords: liability dollarization, currency mismatch, investment, balance sheet effects, liquidity constraints
    JEL: E44 G01 G31 G32
    Date: 2014

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