Template-Type: ReDIF-Paper 1.0
Author-Name: Tsvetelina Nenova
Author-X-Name-First: Tsvetelina
Author-X-Name-Last: Nenova
Author-Name: Andreas Schrimpf
Author-X-Name-First: Andreas
Author-X-Name-Last: Schrimpf
Author-Name: Hyun Song Shin
Author-X-Name-First: Hyun Song
Author-X-Name-Last: Shin
Title: Global portfolio investments and FX derivatives
Abstract: We show that outstanding volumes in FX swaps serve as a good indicator for the hedging activity associated with portfolio positions of advanced economy bond investors. As such, FX swaps serve as a key barometer of risk-taking and global financial conditions. We develop a simple portfolio choice model for international bond investors and use it to estimate the relationship between global FX hedging activity, relative investment opportunities (captured by the yield curve slopes in respective economies), and the hedging costs associated with underlying investments. We find that higher FX hedging activity is closely associated with US portfolio debt inflows and outflows, indicating that FX hedging plays a crucial role in facilitating cross-border bond investments. This connection between FX hedging motives, portfolio bond flows, and the yield curve highlights a mechanism of international financial spillovers - not only from the US but also from advanced economies with significant accumulated wealth flowing into the US.
Creation-Date: 2025-06
File-URL: https://www.bis.org/publ/work1273.pdf
File-Format: Application/pdf
File-Function: Full PDF document
File-URL: https://www.bis.org/publ/work1273.htm
File-Format: text/html
Number: 1273
Keywords: global portfolio investments, FX hedging, financial conditions
Classification-JEL: F31, F32, F42, G15
Handle: RePEc:bis:biswps:1273