Bond flows and liquidity: Do foreigners matter?

Jens H.E. Christensen, Eric Fischer and Patrick J. Shultz

Journal of International Money and Finance, 2021, vol. 117, issue C

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 investment 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 a decade-long increase 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)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:117:y:2021:i:c:s0261560621000462

DOI: 10.1016/j.jimonfin.2021.102397

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