The Impact of Residents’ Overseas Investment on Domestic Swap Rate and Local Exchange Rate

Abstract

Korean residents’ overseas portfolio investment has increased sharply since the year of 2011. Overseas portfolio investment has increased from $100 billion in 2000 to $498 billion (equity securities $294 billion, debt securities $204 billion) in March 2019. The trend is expected to continue due to macroeconomic conditions (low interest rates, expansion of savings over retirement), government policies (activation and deregulation related to overseas investment), and institutional changes (introduction of IFRS in the insurance industry). The trend will have influences on the Korean financial market through various channels. In particular, it is likely to affect the FX market, FX swap market and the external macro-prudential status (short term external debt). Thus it is necessary to analyze the effects and prepare for risks in advance. This study is aimed at presenting policy implications for stabilizing the FX market and FX swap market through empirical studies.