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Foreign participation in local currency bond markets

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  • Burger, John D.
  • Warnock, Francis E.

Abstract

Countries that cannot attract foreigners to invest in their local currency bonds run the risk of currency mismatches that can result in painful crises. We analyze foreign participation in the bond markets of over 40 countries. Bond markets in less developed countries have returns characterized by high variance and negative skewness, factors that we show are eschewed by U.S. investors. While results based on a three-moment CAPM indicate that it is diversifiable idiosyncratic risk that U.S. investors shun, our analysis suggests that countries can improve foreign participation by reducing macroeconomic instability.

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Bibliographic Info

Article provided by Elsevier in its journal Review of Financial Economics.

Volume (Year): 16 (2007)
Issue (Month): 3 ()
Pages: 291-304

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Handle: RePEc:eee:revfin:v:16:y:2007:i:3:p:291-304

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Web page: http://www.elsevier.com/locate/inca/620170

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