DP17454 Granular Investors and International Bond Prices: Scarcity-Induced Safety
With a unique dataset of euro area corporate bonds we study the role of large heterogeneous investors’ demand on currency pricing. We docu- ment that while insurance and pension funds exhibit strong preferences for holding assets issued by local firms and denominated in home currency; mutual funds do not. Motivated by this segmentation, we estimate the impact of investor demand on euro-dollar return differentials (hedged and unhedged) for given security and issuer. These differentials decline as ECB asset purchases induce a drain in euro securities. A dynamic portfolio optimization model of bonds in different currencies, where heterogeneous risk-attitudes lead to UIP deviations and regulation to CIP ones, accounts for the facts.