Diversifying Credit Risk with International Corporate Bonds
Edith X. Liu
Abstract
Open-access reader
Edith X. Liu
Abstract
Open-access reader
This paper explores the potential for US investors to diversify credit risk exposure with international corporate bonds. Using a newly compiled dataset of firm-level monthly corporate bond quotes for foreign and domestic issues, I show that by adding foreign corporate bonds to a benchmark of US equity and bond portfolios, the investor achieves an economically significant reduction in portfolio risk particularly during periods of high volatility in the US markets such as the recent credit crisis. Further, in contrast to the observed US holdings in foreign bonds of 6%, the model implied portfolio holding in foreign corporate bonds should be 25% or more, which implies a potential bond home bias puzzle. Finally, I find that the potential diversification gains cannot be replicated by holding bond issues of foreign firm that trade in the US, known as Yankee bonds, and must be achieved through direct investment in the respective foreign corporate bond markets.
OpenAlex reports 4 citations for this work. Citation counts describe recorded attention and do not establish research quality.
A contribution statement is not available in the OpenAlex record.
Method details are not available in the OpenAlex metadata.
Findings are not separately available in the OpenAlex metadata.
Limitations are not available in the OpenAlex metadata.
Application details are not available in the OpenAlex metadata.
This paper explores the potential for US investors to diversify credit risk exposure with international corporate bonds. Using a newly compiled dataset of firm-level monthly corporate bond quotes for foreign and domestic issues, I show that by adding foreign corporate bonds to a benchmark of US equity and bond portfolios, the investor achieves an economically significant reduction in portfolio risk particularly during periods of high volatility in the US markets such as the recent credit crisis. Further, in contrast to the observed US holdings in foreign bonds of 6%, the model implied portfolio holding in foreign corporate bonds should be 25% or more, which implies a potential bond home bias puzzle. Finally, I find that the potential diversification gains cannot be replicated by holding bond issues of foreign firm that trade in the US, known as Yankee bonds, and must be achieved through direct investment in the respective foreign corporate bond markets.
Key concepts: Bond, Corporate bond, Diversification (marketing strategy), Business, Portfolio, Monetary economics, Bond market, Equity (law)