Template-Type: ReDIF-Paper 1.0
Author-Name: Peter Hördahl
Author-X-Name-First: Peter
Author-X-Name-Last: Hördahl
Author-Name: Giorgio Valente
Author-X-Name-First: Giorgio
Author-X-Name-Last: Valente
Title: Emerging market bond flows and exchange rate returns
Abstract: We study the relationship between international bond ows and exchange rate returns for a panel of emerging market economies (EMEs). Specifically, we investigate whether international net bond ows are correlated with subsequent changes in the value of the local currency against the US dollar. Using a portfolio approach, we find evidence of a positive relationship between bond ows and future exchange rate returns of EMEs, which is not present for advanced economy currencies. EME currencies tend to depreciate following large bond out ows, while they tend to appreciate following in ows. A dollar-neutral portfolio that goes long in in ow currencies and shorts out ow currencies earns large excess returns that are not correlated with ones from known international portfolio strategies. Moreover, using an asset pricing approach, we find strong evidence that a risk factor implied by this result is priced in the cross-section of currencies. These findings are consistent with investors requiring compensation for the risk that countries experiencing large portfolio in ows today could be facing a future tightening of their aggregate financial conditions.
Length: 41 pages
Creation-Date: 2022-09
File-URL: https://www.bis.org/publ/work1042.pdf
File-Format: Application/pdf
File-Function: Full PDF document
File-URL: https://www.bis.org/publ/work1042.htm
File-Format: text/html
Number: 1042
Keywords: Bond ows, exchange rate dynamics, financial conditions.
Classification-JEL: F31,G12, G23, G24.
Handle: RePEc:bis:biswps:1042