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Local Currency Bond Markets, Foreign Investor Participation, and Capital Flow Volatility in Emerging Asia

John Beirne (), Nuobu Renzhi and Ulrich Volz
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Nuobu Renzhi: Asian Development Bank Institute
Ulrich Volz: Asian Development Bank Institute

No 1252, ADBI Working Papers from Asian Development Bank Institute

Abstract: We examine the role of local currency bond markets (LCBMs) and foreign investor participation in these markets in capital flow volatility in emerging Asian economies over the period 1999 to 2020. Using a panel analysis and impulse response functions generated from a panel structural vector autoregression, we show that greater development of LCBMs across 10 Asian emerging economies in terms of capitalization helps to mitigate against capital flow volatility, while foreign investor participation has the opposite effect, particularly for less developed LCBMs. Our findings have policy implications from a financial stability perspective, whereby continued efforts to enhance LCBMs while reducing reliance on foreign investors should be encouraged. Strengthening the local investor base and mobilizing domestic resources through LCBMs ought to be a priority for raising long-term capital that will enable the financing of sustainable investment and development. Our findings also suggest that greater efforts are needed to enhance foreign exchange hedging arrangements for foreign investors in LCBMs, particularly in times of heightened financial stress.

Keywords: capital flow volatility; local currency bond markets (search for similar items in EconPapers)
JEL-codes: F32 F41 F62 (search for similar items in EconPapers)
Pages: 25 pages
Date: 2021-04-09
New Economics Papers: this item is included in nep-cwa and nep-sea
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