Author(s):
Carol Bertaut, Valentina Bruno, Hyun Song Shin
Date:
January 2024
Abstract:
We highlight the role of duration and exchange rate risks on portfolio flows by using a unique and comprehensive database of US investor flows into emerging market government bonds denominated in local currency. Borrowing long-term mitigates roll-over risk but amplifies valuation changes that further interact with currency movements. Our analysis highlights the double-edged nature of long-term borrowing and draws attention to market stress dynamics due to strategic complementarities among mutual fund investors.
Link:
CEPR Discussion Paper No. 18757: Original Sin Redux: Role of Duration Risk