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International Capital Flows and Bond Risk Premia

Jesus Sierra

Staff Working Papers from Bank of Canada

Abstract: This paper studies the impact of international capital flows on asset prices through risk premia. We investigate whether foreign purchases of U.S. Treasury securities significantly contributed to the decline in excess returns on long-term bonds between 1995 and 2008. We run forecasting regressions of realized excess returns on measures of net purchases of treasuries by both foreign official and private agents. We find a clear distinction in the effects of flows on excess returns. Official flows, with a negative and non-linear effect, appear similar to relative supply shocks; private net purchases, with a positive and linear effect, resemble flows that absorb excess supply and are thus compensated in equilibrium for this service, similar to the role of arbitrageurs in preferred-habitat models of the term structure.

Keywords: Financial; markets (search for similar items in EconPapers)
JEL-codes: C C2 C22 F F3 F31 F32 F34 G G1 G11 G12 G15 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2010
New Economics Papers: this item is included in nep-fmk and nep-ifn
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Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:10-14

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