Global Financial Spillovers to Emerging Market Sovereign Bond Markets
23 Pages Posted: 21 Jul 2015
Date Written: June 2015
Foreign holdings of emerging markets (EMs) government bonds have increased substantially over the last decade. While foreign participation in local-currency sovereign bond markets provides an additional source of financing and reduces sovereign yields, it raises concerns about increased sensitivity of yields to shifts in market sentiment. The analysis in this paper suggests that foreign participation and an undiversified investor base transmit global financial shocks to local-currency sovereign bond markets by increasing yield volatility and, beyond a certain threshold, amplify these spillovers. These estimates are robust to a range of econometric techniques including panel smooth threshold regression.
Keywords: Bond markets, Foreign investment, Bond yields, External shocks, Spillovers, Emerging markets, Financial shocks, EM bond markets, Non-linearity, Interest rates, currency, holdings, investors, sovereign bond markets, government bonds
JEL Classification: E43, G01, G15
Suggested Citation: Suggested Citation