Investor Base Dynamics and Sovereign Bond Yield Volatility

Carlos Alberto Piscarreta Pinto Ferreira

No 2022/0234, Working Papers REM from ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa

Abstract: We assess the role of investor base dynamics in explaining sovereign bond yield volatility in a broad number of advanced economies, adding to previous work by investigating the role of both foreign and domestic non-official investors and using local projections to parsimoniously address endogeneity among variables. Our results show that buying and selling have differentiated impacts on volatility. Foreign investors contribute to increase bond yield volatility, mostly through net sales. Domestic investors’ net purchases may help to shield the sovereign issuer against volatility even if their dampening effect is not instantaneously felt or indeed is only observable in the more crucial context of rising yields. The Euro Area, split in two groups of countries that do not respond uniformly to foreign net sales nor enjoy the same level of protection from domestic net purchases, seems vulnerable requiring, from a policy point of view, vigilance, and protection against fragmentation risks.

Date: 2022-07
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