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Foreign participation in local currency bond markets
Author(s) -
Burger John D.,
Warnock Francis E.
Publication year - 2006
Publication title -
review of financial economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.347
H-Index - 41
eISSN - 1873-5924
pISSN - 1058-3300
DOI - 10.1016/j.rfe.2006.09.001
Subject(s) - local currency , bond , currency , monetary economics , economics , skewness , foreign exchange risk , bond market , capital asset pricing model , systematic risk , financial economics , econometrics , finance
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.