Currency Denomination Decision and the Cost of Capital: Evidence from Global Bonds

Abstract

This paper studies the currency choice of government and public agency borrowers when they issue bonds in the international market. In particular, by constructing a comprehensive sample of global bonds issued by these issuers between 1999 and 2011, I find strong evidence that they choose their issuance currency in response to the cost saving opportunities associated with the deviation from uncovered and covered interest rate parity conditions. This finding is robust after controlling for a series of issue- and issuer-related characteristics. In addition, adopting a gravity model, I find that certain non-cost related connections between the issuer's country and the currency country can also motivate an issuer's currency choice.