مشارکت خارجی در بازار اوراق قرضه ارز محلی

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.

The ability to attract foreign participation in local currency bond markets has important benefits for industrial and developing economies alike. Two examples forcibly make this point. In the United States, foreign participation in the Treasury market has helped keep U.S. interest rates relatively low despite anemic U.S. savings rates (Warnock & Warnock, 2005). At the other end of the spectrum are developing economies, which presumably have a greater need for foreign capital but are unfortunately unable to attract foreign investors to their local currency bonds. This inability to attract foreign investors has led to a reliance on foreign currency-denominated debt (Burger and Warnock, 2006 and Eichengreen and Hausmann, 2005) and a concomitant currency mismatch that has been linked to the increased likelihood and severity of financial crises (Goldstein & Turner, 2004). In this paper, we analyze the ability of countries to attract international investors to their local bond markets. Data on all foreigners' investment in local bond markets do not exist, so we rely on high-quality data on the cross-border holdings of one of the largest groups of international bond investors, U.S. investors. The data reveal very limited participation by U.S. investors in local currency bond markets overall, and especially limited in emerging markets. But there is significant cross-country variation, which leads us to investigate factors influencing U.S. investor portfolio decisions. We follow work by Kraus and Litzenberger (1976), de Athayde and Flores (2004), and Harvey, Liechty, Liechty, and Muller (2003) and sketch a model in which investors care about the mean, variance, and skewness of returns. The model predicts that if these characteristics are priced with respect to the U.S. investor, country weights in U.S. investors' international bond portfolios should be a function of bond market capitalizations and direct barriers to international investment. To the contrary, we find evidence that U.S. investors avoid local currency bonds that have returns with historically high variance and negative skewness. Decomposing these risks, we find that U.S. investors are avoiding diversifiable idiosyncratic risk, yet another indication of the home bias in portfolios. Our finding that U.S. investors fail to diversify fully and avoid the most volatile bond markets represents a challenge for emerging economies. The unsavory returns characteristics in emerging markets are most likely tied to macroeconomic instability. Burger and Warnock (2006) demonstrate that improved macroeconomic policies increase the ability to issue bonds in local currency. The results in this paper suggest the same policies will attract greater foreign participation.

This paper investigates the ability of countries to attract foreign participation in local bond markets. We find evidence that U.S. investors avoid local currency bond markets that have returns with high variance and negative skewness. High variance and negative skewness are features found predominantly in emerging markets. Is it possible for emerging markets to attract global investors to their local currency bond markets? If the macroeconomic instability that produces the less than desirable returns characteristics owes to external factors, options for emerging economies are limited. However, if the instability owes to domestic policies, as emphasized in Black (1981), the path is clear. Improved policies can lead to returns characteristics that attract global investors. Moreover, such policies can also produce much deeper local bond markets (Burger & Warnock, 2006), which could enable the creation of derivative markets that allow investors to transfer currency risk to those more willing to bear it.15