International Finance Discussion Papers (IFDP)
February 2004
Foreign Participation in Local-Currency Bond Markets
John D. Burger and 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.
Full paper (screen reader version)Keywords: Bond market development, home bias, emerging market debt, original sin
PDF: Full Paper
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