Appendix. I. Data Sources
Ardagna, Silvia, 2009, Financial Market’s Behavior Around Episodes of Large Changes in the Fiscal Stance,” European Economic Review, 53. 37–55.
Baldacci, E., Gupta, S. and M. Amine, 2008, “Is it (Still) Mostly Fiscal? Determinants of Sovereign Spreads in Emerging Markets (November 2008),” IMF Working Papers 08/259.
Bank for International Settlements (BIS), 2002, The Development of Bond Markets in Emerging Economies” BIS Papers No 11, June 2002.
Blanchard, Olivier, 1984, Current and Anticipated Deficits, Interest Rates and Economic Activity,” NBER Working Paper Series, 1265.
Blommestein, H. and J. Santiso, 2007 New strategies for emerging domestic sovereign bond markets,” OECD development centre, Working Paper, No. 260, April.
Brooks, C., and O.M. Currim, 2002, Modelling the Implied Volatility of Options on Long Gilt Futures,” Journal of Business Finance & Accounting, Vol. 29, pp. 111-137.
Burger, John D., and Francis E. Warnock, 2004, Foreign Participation in Local-Currency Bond Markets,” International Finance Discussion Papers No. 794, (Washington: Board of Governors of the Federal Reserve System, February).
Burger, John; Francis E. Warnock; and Veronica Cacdac Warnock 2009, Global Financial Stability and Local Currency Bond Markets,” forthcoming working paper.
Calvo, G. and E. Talvi, 2005, Sudden stops, financial factors and economic collapses in Latin America: lessons from Argentina and Chile”, NBER Working Paper Series, No. 11153.
Caporale, Guglielmo, M., and Geoffrey Williams, 2002, ” Long-Term Nominal Interest Rates and Domestic Fundamentals,” Review of Financial Economics, Vol. 11, pp. 119–130.
Daniel, L., 2008, Foreign Investors’ Participation in Emerging Market Economies’ Domestic Bond Markets,” Banque de France, Bulletin Digest No. 173.
Eichengreen, B., and R. Hausman, 1999, Exchange Rates and Financial Fragility,” NBER Working Paper No. 7418 (Cambridge, Massachusetts: National Bureau of Economic Research).
Gonzales-Rosada, M., and E. Levy-Yeyati, 2006, Global Factors and Emerging Market Spreads,” Inter-American Development Bank Working Paper, 552.
Guonan Ma & Eli Remolona & He Jianxiong (2006). Developing corporate bond markets in Asia: a synopsis of the Kunming discussions,” BIS Papers chapters, in: Bank for International Settlements (ed.), Developing Corporate Bond Markets in Asia, volume 26.
Hauner, David, and Manmohan Kumar, 2006, Fiscal Policy and Interest Rates: How Sustainable is the New Economy?” IMF Working Paper, WP/06/112.
International Monetary Fund, 2005, Development of Corporate Bond Markets in Emerging Market Countries,” in the Global Financial Stability Report (September 2005).
International Monetary Fund, 2007, Developing Capital Markets in APEC Member Economies” Background paper for the 14th APEC Finance Ministers’ Meeting.
International Monetary Fund, 2008, Development of Bond Markets in Emerging Market Countries” Briefing Note for the G-7 Deputies’ Meeting.
International Monetary Fund, 2010, Resolving the Crisis Legacy and Meeting New Challenges to Financial Stability,” in the Global Financial Stability Report (April 2010).
Kumar Manmohan, and Tatshuyoshi Okimoto, 2009, Dynamics of International Integration of Government Securities’ Markets,” Working Paper.
Laubach, Thomas, 2009, New Evidence on the Interest Rate Effects of Budget Deficits and Debt,” Journal of the European Economic Association, Vol 7, pp. 858–85.
Luengnaruemitchai, Pipat and Li Ong, 2005 An Anatomy of Corporate Bond Markets: Growing Pains and Knowledge Gains,” IMF Working Paper, 05/152.
Roldos, Jorge E., 2004, Emerging Local Bond Markets,” in Emerging Local Securities and Derivatives Markets, World Economic and Financial Surveys (Washington: International Monetary Fund).
Sophastienphong, Kiatchai, Yibin Mu and Carlotta Saporito, 2008. South Asia Bond Markets: Developing Long-Term Finance for Growth, (Washington: World Bank).
This paper narrowly focuses on the role of foreign participation in local government bond markets in EMs rather than corporate bond markets due to data limitations on foreign participation in the latter, although one could expect the impact of foreign participation on the yields and volatility of corporate bonds to be somewhat similar, in theory (see section IV).
About $157 billion of such bonds were issued in the currency of the EM issuer.
The 10 EMs included are Brazil, Czech Republic, Hungary, Indonesia, Mexico, Malaysia, Korea, Thailand, Turkey, and Poland.
The potential role of foreign participation in lengthening EM local currency debt structure is beyond the scope of this study.
For example, IMF (2010) estimates that for every 1 percent shift in the holdings of U.S.-based unlevered institutional investors of domestic securities could translate into a $45 billion reallocation to EM securities annually, or approximately two thirds of the flows to emerging markets in 2009.
Foreign investor will take a direct capital loss when exiting the bond market (as bond prices fall and yields move up) depreciates.
Foreign investors usually impose positive pressure for developing robust market infrastructure and transparent market practices (Luengnaruemitchai and Ong, 2005).
The lack of data on foreign participation in EMs has hampered such a study to date.
There is also a related literature from the finance (Ang and Piazzesi 2003) and macro-finance approaches geared to modeling the term structure (Ruedebusch and Wu 2008), which is not the focus of this study.
While foreign participation data were available for a few countries from 1995 onwards (e.g., Korea and Mexico), the analysis was restricted to 2000-09 to obtain a fairly balanced panel and estimates representative of the entire sample of 10 EMs.
The model is robust to adding to the baseline specification an index of global risk aversion (as measured by the VIX index) as in Baldacci and Kumar (2009) and alternative measures of global interest rates (e.g., federal funds rates). Panel correlations do not suggest that multicollinearity is a serious problem.
All variables are found to be stationary on the basis of Pesaran’s ADF test for panel data, except public debt which is found to be I(1) not a statistically significant determinant and thus excluded from the baseline model. Standard Hausman test results rejected a random effect assumption.
Endogeneity of foreign participation and bond yields is not driving the result as the impact of foreign participation on long-term yields is significant even when instrumenting foreign participation using a General Method of Moments (GMM) estimator.
The lag length of the autoregressive mean equation is determined by the Akaike information criteria while a GARCH(1,1) specification is a standard parsimonious way of expressing the conditional variance equation.
A similar methodology was used by Edwards (1998) to estimate the impact of global factors on interest rate volatility in Latin America during the “Tequila” crisis.
Given the importance of foreign participation, the behavior of domestic institutional investors is an obvious variable. Data limitations on the share of domestic institutional investors in EM domestic bond markets through time preclude such an analysis.