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Foreign Participation in Local Currency Bond Markets

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  • John D. Burger
  • Francis E. Warnock

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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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 12548.

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Date of creation: Oct 2006
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Publication status: published as Review of Financial Economics 16: pp. 291-304 (2007)
Handle: RePEc:nbr:nberwo:12548

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