Bond Flows and Liquidity: Do Foreigners Matter?

Jens Christensen, Eric Fischer and Patrick Shultz

No 2019-08, Working Paper Series from Federal Reserve Bank of San Francisco

Abstract: In their search for yield in the current low interest rate environment, many investors have turned to sovereign debt in emerging economies, which has raised concerns about risks to financial stability from these capital flows. To assess this risk, we study the effects of changes in the foreign-held share of Mexican sovereign bonds on their liquidity premiums. We find that recent increases in foreign holdings of these securities have played a significant role in driving up their liquidity premiums. Provided the higher compensation for bearing liquidity risk is commensurate with the chance of a major foreign-led sell-off in the Mexican government bond market, this development may not pose a material risk to its financial stability.

Keywords: term structure modeling; liquidity risk; financial market frictions; emerging markets; financial stability; foreign holdings (search for similar items in EconPapers)
JEL-codes: E43 E44 F36 G12 (search for similar items in EconPapers)
Pages: 49 pages
Date: 2019-12-05
New Economics Papers: this item is included in nep-mac
Note: The first version of this paper was March 1, 2021.
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Citations: View citations in EconPapers (1)

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DOI: 10.24148/wp2019-08

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