Domestic Elasticity of Default-Free Foreign Bonds

Modeling FX risk adjusted duration of foreign government bonds taking the viewpoint of a domestic investor interested in converting cash flows into domestic currency, we show that foreign bond portfolio managers who fail to adjust for FX risk in calculating duration of foreign sovereign debt observe...

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Bibliographic Details
Published in:Journal of applied finance : JAF 2006-10, Vol.16 (2), p.174
Main Authors: Fooladi, Iraj J, Jacoby, Gady, Roberts, Gordon S, Wiener, Zvi
Format: Article
Language:English
Subjects:
Bond portfolios
Elasticity
Foreign exchange rate risk
Foreign investment
Government bonds
Sovereign debt
Studies
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Summary:Modeling FX risk adjusted duration of foreign government bonds taking the viewpoint of a domestic investor interested in converting cash flows into domestic currency, we show that foreign bond portfolio managers who fail to adjust for FX risk in calculating duration of foreign sovereign debt observe duration with error and consequently engage in inefficient active rate-anticipation and immunization strategies. Using daily bond returns for sovereign issuers in five currencies observed between January 2000 and June 2005, we estimate FX-adjusted elasticity for different maturities. Our empirical findings indicate that FX-adjusted elasticity is significantly different from Macaulay unadjusted duration for all countries and all maturities. [PUBLICATION ABSTRACT]
ISSN:1534-6668