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Carry Trades and FX Risk Buffers: Foreign Currency Debt of Emerging Market Firms

Annie Soyean Lee¹; Steve Pak Yeung Wu²

¹ Johns Hopkins University [email protected] · ² University of California, San Diego [email protected]

The surge in foreign currency (FC) corporate debt in emerging economies has sparked concerns about macroeconomic stability, heightened by speculation about non-financial firms engaging in carry trades. Using firm-level data on the currency denomination of both assets and liabilities, we find evidence of firms' carry trades: firms save in local currency liquid assets and earn higher interest income after issuing short-term FC debt. They also set aside FC liquid assets as FX risk buffers. A large degree of heterogeneity in incentives is observed. Notably, listed firms participate more in carry trades and allocate less FX risk buffers than non-listed firms.

DOI

10.1162/rest_a_01517

Pages

1-45

Language

en

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