nep-ifn New Economics Papers
on International Finance
Issue of 2021‒08‒23
two papers chosen by
Vimal Balasubramaniam
University of Oxford

  1. The rise in foreign currency bonds: the role of US monetary policy and capital controls By Philippe Bacchetta; Rachel Cordonier; Ouarda Merrouche
  2. Currency Management by International Fixed Income Mutual Funds By Clemens Sialm; Qifei Zhu

  1. By: Philippe Bacchetta; Rachel Cordonier; Ouarda Merrouche
    Abstract: An unintended consequence of loose US monetary policy is the increase in currency risk exposure abroad. Using firm-level data on corporate bond issuances in 17 emerging market economies (EME) between 2003 and 2015, we find that EME companies are more likely to issue bonds in foreign currency when US interest rates are low. This increase occurs across the board, including for firms more vulnerable to foreign exchange exposure, and is particularly strong for bonds issued in local markets. Interestingly, capital controls on bond inflows significantly decrease the likelihood of issuing in foreign currency and can even eliminate the adverse impact of low US interest rates. In contrast, macroprudential foreign exchange regulations tend to increase foreign currency issuances of non-financial corporates, although this effect can be significantly reduced using capital controls.
    Keywords: Foreign currency, corporate bonds, emerging markets, capital controls, currency risk
    JEL: G21 G30 E44
    Date: 2021
  2. By: Clemens Sialm; Qifei Zhu
    Abstract: Investments in international fixed income securities are exposed to significant currency risks. We collect novel data on mutual fund currency derivatives and document that around 90% of U.S. international fixed income funds use currency forwards to manage their foreign exchange exposure. Funds' currency forward positions differ substantially based on risk management demands related to portfolio currency exposures, return-enhancement motives such as currency momentum and carry trade, and strategic considerations related to past performance and fund clienteles. Funds that hedge their currency risk exhibit lower return variability, but do not generate inferior abnormal returns.
    JEL: F21 F31 F34 G11 G12 G13 G15 G23 G32
    Date: 2021–07

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