Working Paper Series,
Research Institute of Industrial Economics

Abstract: Many currencies, especially those of countries with negative net foreign assets, tend to depreciate during times of financial turbulence. Using a panel of 26 currencies over the period 1/1997 – 6/2016, I show that the composition of net foreign assets matter for the exchange rate sensitivity to changes in global financial market risk tolerance, where debt financing increases it and equity financing reduces it. Thus, currencies of countries with large negative net external portfolio debt are more vulnerable to changes in financial market uncertainty than currencies with the equivalent net external equity. Ownership matters too, private net foreign debt liabilities heighten the exchange rate sensitivity much more than public. The relationship between banking sector risk intolerance, net external asset positions and exchange rates has, moreover, become stronger since the credit crisis.

Keywords: Exchange rates; Excess currency returns; Net foreign assets; External imbalances; Net foreign portfolio debt; Financial market risk tolerance; Panel data

JEL-codes: C23; F31; F32; G15; G20

50 pages, November 8, 2018

Full text files

wp1246.pdf  Full text

Download statistics

• Research Institute of Industrial Economics
• Ordering Working Papers
• Home page for this series

Questions (including download problems) about the papers in this series should be directed to Elisabeth Gustafsson ()
Report other problems with accessing this service to Sune Karlsson ().

RePEc:hhs:iuiwop:1246This page generated on 2024-09-13 22:15:51.