NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Foreign Participation in Local Currency Bond Markets

John D. Burger, Francis E. Warnock

NBER Working Paper No. 12548
Issued in October 2006
NBER Program(s):   IFM

Countries that cannot attract foreigners to invest in their local currency bonds run the risk of currency mismatches that can result in painful crises. We analyze foreign participation in the bond markets of over 40 countries. Bond markets in less developed countries have returns characterized by high variance and negative skewness, factors that we show are eschewed by U.S. investors. While results based on a three-moment CAPM indicate that it is diversifiable idiosyncratic risk that U.S. investors shun, our analysis suggests that countries can improve foreign participation by reducing macroeconomic instability.

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Document Object Identifier (DOI): 10.3386/w12548

Published: Review of Financial Economics 16: pp. 291-304 (2007) citation courtesy of

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