Currency Bias of Sovereign Wealth Fund Investments

다국어 초록 (Multilingual Abstract)

This study provides an alternative explanation for the poor performance of sovereign wealth fund (SWF) investments based on key currency bias. Using the international portfolio rebalancing model and the matched firm data of 18,704 and 8,267 cases of SWFs’ cross-border investment during 1999–2017, evidence strongly supports the key currency bias hypothesis for the determination of SWFs’ cross-border investments. In sharp contrast to the relationship between the exchange rate and international portfolio flows, the economic rationale for the currency bias is to provide hedging against the exchange risk of SWFs’ cross- border investments by matching the denominated key currency of the SWF sources with the other denominated currency of foreign target assets. This study complements the existing finance literature by providing portfolio implications for analyzing cross-border investments by commercial institution investors and portfolio rebalancing of financial assets between different currency zones.

참고문헌 (Reference)

1 World Bank, "World Development Indicators"

2 Forbes, K. J., "Why Do Foreigners Invest in the United States" 80 (80): 3-21, 2010

3 Rajan, R. G., "What Do We Know about Capital Structure? Some Evidence from International Data" 50 (50): 1421-1460, 1995

4 Chan, K., "What Determines the Domestic Bias and Foreign Bias? Evidence from Mutual Fund Equity Allocations Worldwide" 60 (60): 1495-1534, 2005

5 Lau, S. T., "The World Price of Home Bias" 97 (97): 191-217, 2010

6 Obstfeld, M., "The Six Major Puzzles in International Macroeconomics : Is There a Common Cause" 15 : 339-390, 2000

7 Pavlova, A., "The Role of Portfolio Constraints in the International Propagation of Shocks" 75 (75): 1215-1256, 2008

8 Kim, H., "The Risk Adjusted Uncovered Equity Parity" 30 (30): 1491-1505, 2011

9 Borst, N., "The Rise of Asian Sovereign Wealth Funds" Federal Reserve Bank of San Francisco 2015

10 Stulz, R. M., "The Limits of Financial Globalization" 60 (60): 1595-1638, 2005

11 Bernstein, S., "The Investment Strategies of Sovereign Wealth Funds" NBER 2013

12 Heathcote, J., "The International Diversification Puzzle Is Not as Bad as You Think" 121 (121): 1108-1159, 2013

13 Heathcote, J., "The International Diversification Puzzle Is Not as Bad as You Think" CEPR 2007-2003, 2007

14 Fernandes, N., "The Impact of Sovereign Wealth Funds on Corporate Value and Performance" 26 (26): 76-84, 2014

15 Fotak, V., "The Financial Impact of Sovereign Wealth Fund Investments in Listed Companies" The University of Oklahoma 2008

16 Junghum Park ; 안가람 ; 오동철, "The Efficiency of Financial Holding Companies in Korea" 한국경제학회 36 (36): 29-58, 2020

17 Portes, R., "The Determinants of Cross-Border Equity Flows" 65 (65): 269-296, 2005

18 Ferreira, M. A., "The Colors of Investors’ Money : The Role of Institutional Investors around the World" 88 (88): 499-533, 2008

19 Anselin, L., "Spatial Econometrics: Methods and Models" Kluwer Academic Publishers 1988

20 Boubakri, N., "Sovereign Wealth Funds Targets Selection : A Comparison with Pension Funds" 42 : 60-76, 2016

21 Caner, M., "Sovereign Wealth Funds : The Norwegian Experience" 33 (33): 597-614, 2010

22 Aizenman, J., "Sovereign Wealth Funds : Stylized Facts about Their Determinants and Governance" 12 (12): 351-386, 2009

23 Chhaochharia, V., "Sovereign Wealth Fund: Their Investment Strategies and Performance" University of Miami and International Monetary Fund 2008

24 Knill, A. M., "Sovereign Wealth Fund Investment and the Return-To Risk Performance of Target Firms" 21 (21): 315-340, 2012

25 Bortolotti, B., "Sovereign Wealth Fund Investment Patterns and Performance" 2010

26 Smith, M. P., "Shareholder Activism by Institutional Investors : Evidence from CalPERS" 51 (51): 227-252, 1996

27 Paulson, A., "Raising Capital: The Role of Sovereign Wealth Funds" FRB 258-, 2009

28 Aggarwal, R., "Portfolio Preferences of Foreign Institutional Investors" 29 (29): 2919-2946, 2005

29 Le, C. H. A., "Macro-Financial Linkages and Bank Behaviour : Evidence from the Second-Round Effects of the Global Financial Crisis on East Asia" 6 (6): 365-387, 2016

30 Coeurdacier, N., "International Portfolios, Capital Accumulation and Foreign Assets Dynamics" 80 (80): 100-112, 2010

31 Gompers, P. A., "Institutional Investors and Equity Prices" 116 (116): 229-259, 2001

32 Kim, H., "Home Bias, Risk Differential, and Cultural Spatial Spillover Effects" 51 : 114-136, 2015

33 Coeurdacier, N., "Home Bias in Open Economy Financial Macroeconomics" National Bureau of Economic Research 2013

34 "Hofstede Center for Cultural Distance"

35 Kaufmann, D., "Governance Indicators : Where Are We, Where Should We Be Going" 23 (23): 1-30, 2008

36 Kotter, J., "Friends or Foes? Target Selection Decisions of Sovereign Wealth Funds and Their Consequences" 101 (101): 360-381, 2011

37 Zhang, H., "Foreign Bias of Sovereign Wealth Fund and Spatial Spillover Effects" 64 (64): 377-397, 2019

38 Dewenter, K. L., "Firm Values and Sovereign Wealth Fund Investments" 98 (98): 256-278, 2010

39 Kim, K., "Explaining Equity Home Bias Using Hedging Motives against Real Exchange Rate and Wage Risks" 73 : 30-43, 2021

40 Ciarlone, A., "Escaping Financial Crises? Macro Evidence Based on SWFs’ Investment Behavior"

41 The Frazer Institute, "Economic Freedom Forum"

42 Grira, J., "Does Political Risk Matter for Sovereign Wealth Funds? International Evidence" 2018

43 Coeurdacier, N., "Do Trade Costs in Goods Market Lead to Home Bias in Equities?" 77 (77): 86-100, 2009

44 Gangi, F., "Do Investment Determinants and Effects Vary across Sovereign Wealth Fund Categories? A Firm-Level Analysis" 38 : 438-457, 2019

45 Dahlquist, M., "Direct Foreign Ownership, Institutional Investors, and Firm Characteristics" 59 (59): 413-440, 2001

46 Johan, S., "Determinants of Sovereign Wealth Fund Investment in Private Equity versus Public Equity" Tilburg University 2012

47 Megginson, W. L., "Determinants of Sovereign Wealth Fund Cross-Border Investments" 48 (48): 539-572, 2013

48 Sovereign Wealth Fund Transaction, "Database"

49 Danis, H., "Conditional Jump Dynamics in Stock Returns : Evidence from MIST Stock Exchanges" 60 (60): 1-17, 2015

50 Hau, H., "Can Portfolio Rebalancing Explain the Dynamics of Equity Returns, Equity Flows, and Exchange Rates?" 94 (94): 126-133, 2004

51 Miracky, W. F., "Assessing the Risks:The Behaviors of Sovereign Wealth Funds in the Global Economy" Monitor Group 2008

52 Bradshaw, M. T., "Accounting Choice, Home Bias, and US Investment in Non-US Firms" 42 (42): 795-841, 2004

53 Beugelsdijk, S., "A Cultural Explanation of the Foreign Bias in International Asset Allocation" 34 (34): 2121-2131, 2010

54 Truman, E., "A Blueprint for Sovereign Wealth Fund Best Practices" Peterson Institute for International Economics 2008

55 Pyun, J. H., "(Asymmetric)Trade Costs, Real Exchange Rate Hedging, and Equity Home Bias in a Multicountry Model" 26 (26): 357-377, 2018