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Foreign participation in local-currency bond markets

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Author Info
John D. Burger
Francis E. Warnock
Abstract

We analyze the development of, and foreign participation in, 49 local bond markets. Countries with stable inflation rates and strong creditor rights have more developed local bond markets and rely less on foreign-currency-denominated bonds. Less developed bond markets have returns characterized by high variance and negative skewness, factors eschewed by U.S. investors. Results based on a three-moment CAPM indicate, however, that it is diversifiable idiosyncratic risk that U.S. investors appear to shun. Taken as a whole our results hint at a virtuous cycle of bond market development: Creditor friendly policies and laws can spark local bond market development that enables the development of derivatives markets and, in turn, attracts foreign participation.

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Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 794.

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Date of creation: 2004
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Keywords: Bond market;

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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Sorensen, Bent E & Wu, Yi-Tsung & Yosha, Oved & Zhu, Yu, 2005. "Home Bias and International Risk Sharing: Twin Puzzles Separated at Birth," CEPR Discussion Papers 5113, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  2. Francis E. Warnock, 2006. "How Might a Disorderly Resolution of Global Imbalances Affect Global Wealth?," IMF Working Papers 06/170, International Monetary Fund. [Downloadable!]
  3. Paul Lejot & Douglas Arner & Liu Qiao, 2004. "Making Markets: Reforms to Strengthen Asia's Debt Capital Markets," Working Papers 132004, Hong Kong Institute for Monetary Research. [Downloadable!]
  4. Barry Eichengreen & Pipat Luengnaruemitchai, 2004. "Why Dones't Asia have the biger bond markets," Working Papers 242004, Hong Kong Institute for Monetary Research. [Downloadable!]
  5. Caroline Freund & Frank Warnock, 2005. "Current Account Deficits in Industrial Countries: The Bigger They are, the Harder They Fall?," NBER Working Papers 11823, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  6. Michael Fidora & Marcel Fratzscher & Christian Thimann, 2006. "Home bias in global bond and equity markets - the role of real exchange rate volatility," Working Paper Series 685, European Central Bank. [Downloadable!]
    Other versions:
  7. Galina Hale & Assaf Razin & Hui Tong, 2006. "Institutional Weakness and Stock Price Volatility," NBER Working Papers 12127, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  8. Cai, Fang & Warnock, Francis E., 2005. "International diversification at home and abroad," Discussion Paper Series 1: Economic Studies 2005,06, Deutsche Bundesbank, Research Centre. [Downloadable!]
  9. Philip R. Lane, 2006. "Global Bond Portfolios and EMU," International Journal of Central Banking, International Journal of Central Banking, vol. 2(2), May. [Downloadable!]
    Other versions:
  10. Li L. Ong & Pipat Luengnaruemitchai, 2005. "An Anatomy of Corporate Bond Markets: Growing Pains and Knowledge Gains," IMF Working Papers 05/152, International Monetary Fund. [Downloadable!]
  11. Barbara Fritz & Laurissa Mühlich, 2006. "Regional Monetary Integration among Developing Countries: New Opportunities for Macroeconomic Stability beyond the Theory of Optimum Currency Areas?," GIGA Working Paper Series 38, GIGA German Institute of Global and Area Studies. [Downloadable!]
  12. Fang Cai & Francis E. Warnock, 2004. "International diversification at home and abroad," International Finance Discussion Papers 793, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  13. Cedric Tille, 2005. "Financial integration and the wealth effect of exchange rate fluctuations," Staff Reports 226, Federal Reserve Bank of New York. [Downloadable!]
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  14. Barry Eichengreen & Pipat Luengnaruemitchai, 2004. "Why Doesn't Asia Have Bigger Bond Markets?," NBER Working Papers 10576, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  15. Ramon Moreno, 2008. "Monetary policy transmission and the long-term interest rate in emerging markets," BIS Papers chapters, in: Bank for International Settlements (ed.), Transmission mechanisms for monetary policy in emerging market economies, volume 35, pages 61-79 Bank for International Settlements. [Downloadable!]
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