Page 410 - Special Topic Session (STS) - Volume 3

STS552 Carol C. Bertaut et al.
foreign investors, and the ability to issue larger, lower-rated or longer-maturity
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bonds.
The growing importance of mutual funds as a vehicle for cross-border
investment provides a third source of distortions in the official statistics. Under
international standards, holdings of investment fund shares are classified as equity
holdings and are assigned to the country of fund incorporation. These standards
apply regardless of the focus of the investment fund in terms of either the type of
assets that the fund invests in or country of investment focus.
That traditional residence-based statistics are do not adequately represent
exposures is gaining increasing recognition. For example, the Bank for
International Settlements (BIS) now publishes its statistics on international debt
securities on both a residence and a nationality basis, highlighting the rapid
growth of issuance via offshore financial centers. Similarly, the world’s largest
sovereign wealth fund, the Norwegian Government Pension Fund, lists its roughly
$1 billion portfolio holdings on both a country of incorporation (residence) basis
and on a country of exposure basis. In the academic community, Lane and
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Milesi-Ferretti (2017) provide an overview of the distortionary effects of
increasing offshore issuance and financial center intermediation on properly
assessing external exposures.

2. Methodology
We use the U.S. cross-border portfolio as a case study to document the extent
of distortions in traditional residence-based statistics. With cross-border holdings
of $12.4 trillion as of end-2017, the United States in aggregate is the single largest
cross-border investor, reflecting holdings of a wide and diverse set of investors.
For our study, we exploit the underlying security-level data on U.S. cross-border
portfolio holdings collected on a legal residence basis for construction of the U.S.
balance of payments statistics. Using security-level identifiers as well as modern
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text matching techniques, we map these holdings, security by security, to the
country of exposure for each firm assigned by commercial investment products
designed for international investors, thus converting these holdings to a
nationality basis. For common stock equity holdings, we rely primarily on MSCI
constituent information, supplemented with information on the primary

4 See for example Black and Munro (2010). Serena and Moreno (2016) identify a pickup in
offshore issuance by firms in EMEs following the global financial crisis, which they attribute to
declining financing costs and the less developed state of EME financial markets more generally.
However, since the Asian Financial Crisis in the late 1990s has been away from offshore
issuance, which is generally denominated in hard currencies, toward local-currency issuance in
the domestic bond market (Black and Munro 2010, Mizen et al 2012, Hale et al 2016).
5 https://www.nbim.no/
6 See Cohen et al. (2018).
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