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Bond Markets As Conduits for Capital Flows

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  • Pipat Luengnaruemitchai
  • Barry J. Eichengreen

Abstract

We use data on the extent to which residents of one country hold the bonds of issuers resident in another as a measure of financial integration or interrelatedness, asking how Asia compares with Europe and Latin America and with the base case in which the purchaser and issuer of the bonds reside in different regions. Not surprisingly, we find that Europe is more financially integrated than other regions. Asia, more interestingly, already seems to have made more progress on this front than Latin America and other parts of the world. The contrast with Latin America is largely explained by stronger creditor and investor rights, better contract enforcement, and greater transparency, all of which are conducive to foreign participation in local markets and to intraregional cross holdings of Asian bonds generally. Further results based on a limited sample suggest that one factor holding back investment in foreign bonds in East Asia may be limited geographical diversification by mutual funds, in turn reflecting a dearth of appropriate assets. Asian Bond Fund 2, by creating a passively managed portfolio of local currency bonds potentially attractive to mutual fund managers and investors, may help to relax this constraint.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 06/238.

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Length: 42
Date of creation: 01 Oct 2006
Date of revision:
Handle: RePEc:imf:imfwpa:06/238

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Keywords: Asia; Capital flows; Foreign investment; Economic models; bond; bonds; bond transactions; bond markets; bond returns; bond market; stock market; debt securities; foreign bonds; capital controls; bond market development; stock market capitalization; government bonds; bond fund; financial sector; financial markets; capital markets; local bond; asian bond markets; international financial statistics; domestic bond markets; corporate bonds; domestic bond; hedging; international country risk guide; stock exchanges; bond investment; financial assets; capital transactions; bond indices; international capital; local bond markets; financial market; equity markets; development of bond markets; bond investments; financial stability; commodity trade; capital movements; domestic credit; financial systems; bond issues; international bank lending; capital inflows; stock markets; financial system; bondholders; portfolio investment; market bond; financial instruments; volatile capital flows; bond portfolio; international banks; international financial markets; bond return; index funds; denominated bonds; equity returns; volatile capital; global bond market; financial services; capital control; london interbank offer rate; government securities; bond index; domestic interest rates; securitization; corporate bond; emerging market bond; corporate bond markets; debt instrument; credit rating; development of corporate bond markets; capital gains; emerging market bonds; global bond; capital flow; commercial bank loans; money market; government bond; border capital flows; bond flows; equity investment;

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References

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Citations

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Cited by:
  1. Yohei Okawa & Eric van Wincoop, 2010. "Gravity in International Finance," Working Papers, Hong Kong Institute for Monetary Research 072010, Hong Kong Institute for Monetary Research.
  2. Vo, Xuan Vinh, 2009. "International financial integration in Asian bond markets," Research in International Business and Finance, Elsevier, Elsevier, vol. 23(1), pages 90-106, January.
  3. Sabine Herrmann & Adalbert Winkler, 2009. "Real convergence, financial markets, and the current account - Emerging Europe versus emerging Asia," European Economy - Economic Papers, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission 362, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.
  4. Abid, Fathi & Bahloul, Slah, 2011. "Selected MENA countries' attractiveness to G7 investors," Economic Modelling, Elsevier, Elsevier, vol. 28(5), pages 2197-2207, September.
  5. Jamel Boukhatem, 2009. "Essai sur les déterminants empiriques de développement des marchés obligataires," EconomiX Working Papers 2009-32, University of Paris West - Nanterre la Défense, EconomiX.
  6. Woosik Moon, 2011. "Whither East Asian economic integration? Korea’s regionalization cum globalization strategy," Asia Europe Journal, Springer, Springer, vol. 9(1), pages 29-42, November.
  7. Eichengreen, Barry & Mehl, Arnaud & Chiţu, Livia, 2012. "History, gravity and international finance," Working Paper Series, European Central Bank 1466, European Central Bank.
  8. Hiroshi Fujiki & Akiko Terada-Hagiwara, 2007. "Financial Integration in East Asia," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, Institute for Monetary and Economic Studies, Bank of Japan, vol. 25(S1), pages 57-100, December.
  9. Rudiger Ahrend & Antoine Goujard, 2012. "International Capital Mobility and Financial Fragility - Part 1. Drivers of Systemic Banking Crises: The Role of Bank-Balance-Sheet Contagion and Financial Account Structure," OECD Economics Department Working Papers 902, OECD Publishing.
  10. Ramgopal Agarwala, 2008. "Towards An Asian “Bretton Woods†for Restructuring of the Regional Financial Architecture," Finance Working Papers 22079, East Asian Bureau of Economic Research.
  11. Rudiger Ahrend & Antoine Goujard, 2012. "International Capital Mobility and Financial Fragility - Part 3. How Do Structural Policies Affect Financial Crisis Risk?: Evidence from Past Crises Across OECD and Emerging Economies," OECD Economics Department Working Papers 966, OECD Publishing.

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