Download This PaperForeign Participation in Local-Currency Bond Markets
Darden Business School Working Paper No. 05-07
FRB International Finance Discussion Paper No. 794
22 Pages Posted: 22 Jul 2005
Date Written: February 2004
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.
Keywords: home bias, emerging market debt, diversification, original sin
JEL Classification: F30, G11, G15, O16
Suggested Citation: Suggested Citation
Francis E. Warnock (Contact Author)
University of Virginia - Darden Business School ( email )
P.O. Box 6550
Charlottesville, VA 22906-6550
United States
434-924-6076 (Phone)
HOME PAGE: http://faculty.darden.virginia.edu/warnockf/index.htm
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