Global risk transmission to local financial conditions and the participation of foreign investors in Emerging Market Economies’ sovereign bond markets: The case of Colombia

Oscar Botero-Ramírez, Andrés Murcia and Hernando Vargas-Herrera

Borradores de Economia from Banco de la Republica de Colombia

Abstract: Foreign investor participation in Colombia’s domestic sovereign bond market surged after 2014, lowering yields, and supporting local-currency debt issuance and local market liquidity. However, it also increased the market’s sensitivity to global financial shocks. Empirical analysis suggests that during periods of high foreign participation in the local sovereign debt market (2014–2022), global risk factors had a stronger impact on domestic financial conditions, while the recent decline in foreign participation since 2023 has somewhat reduced this sensitivity. The Central Bank’s flexible inflation-targeting regime, supported by a fully flexible exchange rate regime and robust external buffers, has helped manage these risks, as demonstrated during the Covid-19 pandemic. The evolving composition of foreign investors remains a key channel for the transmission of global shocks to Colombia’s financial conditions. *****RESUMEN: La participación de inversionistas extranjeros en el mercado local de deuda soberana de Colombia aumentó significativamente después de 2014, reduciendo los rendimientos y apoyando la emisión de deuda en moneda local y la liquidez del mercado. Sin embargo, esto también incrementó la sensibilidad del mercado a los choques financieros globales. El análisis empírico sugiere que, durante los periodos de alta participación extranjera en el mercado local de deuda soberana (2014–2022), los factores de riesgo global tuvieron un impacto más fuerte sobre las condiciones financieras internas, mientras que la reciente disminución en la participación extranjera desde 2023 ha reducido parcialmente esta sensibilidad. El régimen de metas de inflación flexible del Banco Central, respaldado por un régimen cambiario totalmente flexible y sólidos colchones externos, ha ayudado a gestionar estos riesgos, como se demostró durante la pandemia del Covid-19. La composición cambiante de los inversionistas extranjeros sigue siendo un canal clave para la transmisión de choques globales a las condiciones financieras de Colombia.

Keywords: sovereign bond markets; foreign investors; benchmark-driven investors; global risk transmission; financial conditions; original sin; inflation-targeting; exchange-rate flexibility; central banking; Colombia; mercados de deuda soberana; inversionistas extranjeros; inversionistas indexados; transmisión del riesgo global; condiciones financieras; pecado original; metas de inflación; flexibilidad cambiaria; banca central (search for similar items in EconPapers)
JEL-codes: E44 E52 F30 F31 F32 F34 F38 G12 G15 G18 (search for similar items in EconPapers)
Pages: 16
Date: 2025-12
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https://doi.org/10.32468/be.1336

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Persistent link: https://EconPapers.repec.org/RePEc:bdr:borrec:1336

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