Do foreign investors have a positive impact on the domestic government bonds market? A panel pooled mean group approach

Abstract

This study examines foreign investors’ impact on the domestic government bond market’s yield and volatility by employing a pooled mean group (PMG) approach. The study uses the panel data of 38 countries from 2004 to 2018. The study finds that in the whole sample and the sub-set of developing countries, both in the long and short run, a large proportion of foreign investors is associated with a reduction in domestic government bond yields. However, an analysis of foreign investment’s effect on the bond yield’s volatility brought significant results only in the short run, while there is no substantial evidence of any long-run effects. The PMG methodology in this study allows differentiation between the long- and short-run relationships between foreign ownership and bond yield and yield volatility. Our sample allows the analysis and comparison of these relationships in developed and developing countries. We further apply nonlinear autoregressive distributed lag (ARDL) to test for potential asymmetry in the relationship, which has not been done in other studies.