Foreign Bonds Research Articles

International portfolio rebalancing and fiscal policy spillovers

We theoretically and empirically evaluate the spillover effects of debt-financed fiscal policy interventions of the United States on other economies. We first consider a two-country dynamic stochastic general equilibrium model with international portfolio rebalancing effects arising from an imperfect substitutability between short- and long-term domestic and foreign bonds. We show that the model predicts fiscal multipliers for the US similar to those found in the literature. For international spillovers, the model shows that US fiscal expansions financed by long-term debt issuance would, on net, hinder economic activity in the rest of the world (ROW). This is despite the standard trade channel's net positive effect on the ROW economy given the depreciation in the ROW currency. The fall in ROW output occurs mainly due to the increase in the ROW term premiums and long-term rates through the portfolio rebalancing channel, as the relative demand for ROW long-term bonds decreases following the increase in the supply of US long-term bonds accompanying the fiscal expansion. Testing the predictions of our theoretical model by using panel regressions and vector autoregressions, we find empirical support for the trade and portfolio balance channels of fiscal spillovers and for the negative relationship between ROW output and US fiscal policy shocks.

한중 양국 중소기업해외채권 회수제도 비교 연구

According to the Korea Trade Insurance Corporation, the amount of funds that have not yet received payment for exports in 2021 is 82 million US dollars (106.6 billion Korean won), and the total amount of accounts receivable in the past five years has reached 1.3 trillion Korean won. According to the Korea Trade Association, although the issuance scale of foreign bonds is increasing, the cumulative recovery rate is as low as around 30%. The average recovery rate of overseas accounts receivable owed by Chinese export enterprises is only 20%. Combined with a 5% export bad debt rate, it basically means that 4% of the annual export amount cannot be recovered. For small and medium-sized enterprises with weak risk resistance, cash flow is crucial for their survival. In general, there are two common ways to obtain compensation for uncollected debts: by purchasing pre export credit insurance or by seeking an ECA agency for agency recovery. The public export credit agencies (ECA) K-SURE and SINOSURE of the two countries are exploring the differences and similarities in overseas bond recovery systems, while hoping to provide better bond recovery methods for small and medium-sized enterprises and help with overseas bond recovery.

Corporate foreign bond issuance and interfirm loans in China

We use firm-level data to analyze international bond issuance by Chinese non-financial corporations, distinguishing those by sectors classed as ‘risky’. Dollar issuance is positively correlated with the differential between domestic and foreign interest rates, and this effect is particularly strong for firms in risky sectors. Strikingly, firms in risky sectors use the proceeds to do more interfirm lending than firms in non-risky sectors. Moreover, this lending rose significantly after the authorities sought to restrict the financial activities of risky sectors in 2008–09. Firms in risky sectors compound risk by engaging in speculative activities that mimic the behavior of financial institutions while escaping prudential regulation.

The impact of bond market liberalization on accounting conservatism

AbstractIn a quasi‐natural experimental setting in which Bond Connect allows foreign investors to trade in the Chinese interbank bond market, we predict and find that firms subject to the program increase their accounting conservatism. Further analyses suggest that the increase is concentrated among firms with higher litigation risk, more corporate site visits and greater media attention from overseas, suggesting that foreign bond investors affect firms through the channel of bondholder litigation and monitoring. Additionally, we document that improvement in conservatism is more pronounced when foreign investors participate more and for firms with looser issuance criteria. We also find that enhanced conservatism results in a lower cost of debt for bonds in the liberalized market and those of the same issuers in the nonliberalized market, as well as lower overinvestments and fewer dividends. In addition, firms show greater conservatism in other forms of public disclosure. Together, these findings suggest that firms enhance accounting conservatism to facilitate foreign bond investors’ assessment of credit risk.

A MODEL OF GROSS CAPITAL FLOWS: RISK SHARING AND FINANCIAL FRICTIONS

AbstractThis article builds a two‐country model of gross capital flows where agents share tradable output risk using two bonds, subject to stochastic collateral constraints. Equilibrium portfolios are short in domestic bonds and long in foreign bonds because the endogenous movements of the real exchange rate provide a hedge against domestic output shocks. Under negative domestic shocks, these external positions transfer wealth from home to abroad. During the Great Recession, the model shows that such wealth transfer from the United States mitigated the consumption drop abroad. Quantitatively, financial frictions account for about half of the collapse in U.S. gross flows in 2008.

Testing Portfolio Balance Approach to Exchange Rate during Managed Float: An Empirical Evidence from India

Any global economic and financial disturbance affects trade and capital flows of our economy through exchange rate movements. The portfolio balance (PB) approach considers the capital flows as an additional variable explaining the exchange rate movements. This approach assumes domestic and foreign bonds to be imperfect substitutes. The bonds bearing high risk carry comparatively higher return in the form of risk premium. This study attempts to re-examine the empirical soundness of the PB model in respect of Indian rupee/ US dollar (INR/US $) exchange rate. It covers the period from 2000: 1 to 2023:1. Augmented Dickey Fuller test and Phillip Perron tests are used to test stationarity property of the variables. The Ordinary Least Square (OLS) methodology of regression is used for the purpose of estimation. Autocorrelation problem is dealt with by using the Cochrane Orcutt procedure. The PB model is estimated in naïve form as well as in partial adjustment form. The empirical finding shows that the PB model works well in partial adjustment framework rather than in its naïve form with speed of adjustment being three to four quarters. The money supply differential and relative real Gross Domestic Product (GDP) are identified as significant variables whereas the bond holding variable remained insignificant. However, in the long run, the model did not work. It is suggested that the fiscal and monetary policies that enhance capital spending in productive sectors should be implemented to achieve a gradually appreciating exchange rate.

The impact of macroprudential cross-border capital flow management on the linkage of domestic and foreign bond markets

While cross-border financing activities have increased significantly in recent years, the inflow of capital also leads to accumulated financial risks. To mitigate financial risks and promote the opening of financial markets, macroprudential management policies for cross-border financing have been implemented since 2016. This paper examines the effectiveness of macroprudential management policies in opening financial markets and managing foreign financial risks. We employ a time-varying parameter vector autoregressive model (TVP-VAR) to quantitatively analyze changes in the spillover effects between China’s bond market and foreign bond markets under different implementation stages of cross-border financing macroprudential policy. Our analysis reveals that the implementation of macroprudential management of cross-border financing has increased the total spillover effect between different bond markets, as well as the spillover effect from other bond indices to the Chinese RMB Bond Index and the spillover effect from other indices to the Chinese USD index. Moreover, our findings indicate that macroprudential management has reduced the total volatility spillover effect and the volatility spillover effect from other indices to the Chinese RMB Bond Index. These results highlight the importance of preventing external risk transmission when China’s financial market is opening to the world.

Foreign Equity Portfolio Investments and Market Returns at the NSE20 Share Index; Kenya

Purpose: Foreign portfolio investments have continued to play an important role in the world today because investors are more interested in investments that will give them higher returns for their investments. The purpose the study was to establish the effect of foreign portfolio investments and market returns in Kenya. The specific variables studied were foreign equity portfolios, foreign bond portfolios, foreign portfolio of treasury bills and foreign portfolio of exchange traded funds and how they affect the market returns at the NSE20 share index in Kenya.
 Methodology: The research methodology applied panel regression for inferential findings and Langrage multiplier test done to determine the pooled effect with the aid of STATA 18 software. Secondary data was sourced from the NSE annual reports, CMA bulletins, CBK websites of the respective companies listed in the index for the period between 2013 to 2022.
 Findings: The study findings indicated a positive and significant relationship of foreign equity portfolios, foreign portfolio of T Bills and foreign portfolio of ETFs with market returns at the NSE20 share index. Conversely, foreign bond portfolio exhibited a negative significant relationship with market returns at the NSE 20 share index.
 Unique Contribution to Theory, Practice and Policy: The study supported Modern Portfolio Theory(MPT) that suggests that for an investor to maximize returns, an investor will choose from a wide array of portfolios that will suit his needs and risk profiles and Neoclassical Theory of Investment that suggests that investors will take advantage of location differences to profit from arbitrage opportunities and Total portfolio theory that suggests that combination of securities posits a higher performance due to significant diversification benefits linked to a basket of securities. The Modern portfolio theory measuring market return seemed to hold in that it will give an investor an understanding of the most efficient portfolio that will give the largest returns at a given level of risk. The theory was suggested for future related research because it will give an investor a strategy for successful portfolio investments.

Capital flows to developing countries: Implications for monetary policy across the globe

AbstractThe public sectors in many developing countries receive capital inflows from advanced countries. Notably, we show that higher levels of foreign borrowing play an important role in promoting economic activity in developing countries by relieving crowding out problems from local sovereign debt. Moreover, in comparison to previous contributions, we also show how participation affects economic activity in advanced countries. Using a micro‐founded two‐country model of money and banking, we show that there are crowding‐out effects in high income economies when the advanced country funds official foreign debt. Moreover, we find that there are significant implications for the effects of monetary policy when banks in the developed world hold more official foreign debt. In addition, the typical destructive effects of money growth in developing countries are weaker in the presence of higher levels of international borrowing. By comparison, the effects of monetary stimulus in the advanced country become more pronounced as banks hold more foreign bonds. Our analysis concludes by looking at optimal debt policy. Interestingly, the results suggest that developing countries should limit their reliance on foreign capital inflows.

Optimal bond holding dynamics with hedging against real exchange rate risks

This study examines optimal bond holding dynamics using a two-country DSGE model with two bonds. Unlike previous studies focusing on steady-state properties of optimal bond holdings, we solve the model by employing a third-order approximation method and show how optimal bond holdings respond when macro fundamentals change. In particular, we derive impulse responses of optimal home and foreign bond holdings to productivity shocks. Simulation results show that with a positive productivity shock at home, optimizing home agents decrease holdings of home bonds and increase holdings of foreign bonds. Correlation between relative price and excess bond returns following a positive productivity shock makes home (foreign) bond a less (more) attractive hedging tool against real exchange rate risks. In addition, we use a SVAR method and verify that the optimal bond holding dynamics derived from the model are observed in the data.

Inflation Adjustment, Endogenous Risk Premium and Exchange Rate: A Theoretical Analysis

This article develops a full employment monetary framework that deals with the interaction between exchange rate and inflation rate dynamics, emphasising the existence of risk premium. The economy consists of internal and foreign bonds. These are close substitutes since there exists a risk premium that depends on inflation rate, budget deficit and net exports. According to the monetary policy rule, both inflation rate and exchange rate negatively influence money supply. Overtime, changes in inflation rate are proportional to the excess supply in the money market. The dynamic adjustment of exchange rate arises due to discrepancy between home interest rate and world rate of interest and risk premium. Based on this framework, we investigate the implications of increase in exports, technological innovation and policy mix for the interaction between exchange rate and inflation rate. JEL Codes: E31, E63, F32, F41

An Unintended Consequence of Uncoordinated International Monetary Policy on Central America

This research explores causes and implications of the foreign indebtedness of Central American countries in the 2010s, that is, during what has been defined the second phase of global liquidity, marked by the quantitative easing (QE) of central banks in developed economies. Looking at their balance of payments and their contemporary sources of funding, we find that the international bond market became an important source of debt for Central American economies during that decade. We also find that non-financial corporations’ foreign bond issuance has been increasing in some of the countries under study, even though less than in larger emerging economies. Classifying these countries’ international debt securities by residence and nationality of the issuer, we identify another peculiarity with important implications about financial fragility. In fact, as opposed to what occurred to larger emerging economies, the general governments issuing foreign bonds has been a more relevant source of risk than the issuance by financial and non-financial corporations.

Exchange Rate Reconnect

Abstract It is surprisingly difficult to find economic variables that strongly comove with exchange rates, a phenomenon codified in a large literature as “exchange rate disconnect.” We demonstrate that a variety of common proxies for global risk appetite, which did not comove with exchange rates prior to 2007, have provided significant in-sample explanatory power for currencies since then. Furthermore, during the 2007–2012 period, U.S. purchases of foreign bonds were highly correlated with these risk measures and with exchange rates. Our results support the narrative that the U.S. dollar's role as an international and safe-haven currency has surged since the global financial crisis.

A Study on Dynamic Asset Allocation Strategy for Optimal Portfolio Selection

We use iterative numerical procedures combined with analytical methods due to Rapach and Wohar (2009) to solve for the dynamic asset allocation strategy for optimal portfolio demand. We compare different optimal portfolio demands when investors in each country have different access to overseas and domestic investment opportunities. The optimal dynamic asset allocation strategy without foreign investment opportunities leads domestic investors in Korea, Hong Kong, and Singapore to allocate more funds to domestic bonds than to domestic stocks. However, the U.S. investors allocate more wealth to domestic stocks than to domestic bonds. Investors in all countries short bills at a low level of risk aversion. Next, we investigate dynamic asset allocation strategy when domestic investors in Korea have access to foreign markets. The optimal portfolio demand leads investors in Korea to allocate most resources to domestic bonds and foreign stocks. On the other hand, the portfolio weights on foreign bonds and domestic stocks are relatively low. We also analyze dynamic asset allocation strategy for the investors in the U.S., Hong Kong, and Singapore when they have access to the Korean markets as overseas investment opportunities. Compared to the results when the investors only have access to domestic markets, the investors in the U.S. and Singapore increase the portfolio weights on domestic stocks in spite of the overseas investment opportunities in the Korean markets. The investors in the U.S., Hong Kong, and Singapore short domestic bills to invest more than initial funds in risky assets with a varying degree of relative risk aversion coefficients without exception.

Modelling the trade balance between the northern and southern eurozone using an intertemporal approach

We use an intertemporal model to examine the division of the Eurozone area into countries with persistent trade account surpluses and those with persistent deficits. This is done by examining the trade account balances between a Northern group of countries that are in persistent trade account surplus and a Southern group of countries that have persistent deficits over the period 2001–2018. The theoretical model highlights the interaction of consumption, portfolio optimization between holdings of domestic and foreign bonds, fiscal balances, changes in the demand to hold money balances and changes in the pricing of risk in financial markets as reflected in changes in the interest rate differentials. We test the model using both the ARDL and Fully Modified OLS methodologies and find that it performs well empirically with relevant coefficients being both right signed and significant.

Exchange Rate, Output and Macroeconomic Policy: A Structuralist Approach

Current account imbalance and concomitant macroeconomic instability in emerging market economies have been major issues of recent macroeconomic modelling. This paper addresses these issues by asking how international interdependence has impinged on key macroeconomic variables and policy options. There are three assets: domestic bonds, foreign bonds and money. Domestic bonds and foreign bonds are imperfect substitutes due to presence of risk premium. The striking features of the model include endogenous risk premium and balance sheet effect on investment demand due to exchange rate depreciation. We use a simple open economy structuralist macro model that explains the interaction between current account adjustment and exchange rate dynamics. The balance sheet effect and the risk premium together explain how fiscal expansion or monetary expansion may have both short run and long run contractionary effect on the output level with worsening current account balance in the short run. JEL Classifications: F41, F32, E52, E62 Keywords: Current Account, Exchange Rate, Risk Premium, Balance Sheet Effect

Нерациональные предпочтения инвесторов и их влияние на размещение внешних облигационных займов Российской Федерации на международном рынке капитала

Due to the constant growth of competition, as well as the need to introduce innovative technologies in production processes and build a customer-oriented model, the issue of attracting additional funding is particularly acute for both the state and companies. The relevance of this article is due to the fact that the current approach of the Russian Federation to the designation of investment attractiveness cannot fully determine the basis for the trust and interest of foreign investors. This article is intended to consider the psychological aspects that affect the irrational behavior of investors and their impact on the placement of foreign bond loans of the Russian Federation. The purpose of this article is to form proposals for creating a positive investment expectation and to use this experience in Russian practice. In the process of studying this problem, general scientific empirical methods were used: data collection and study, comparison and synthesis, and the method of scientific abstraction. As a result of the study, the author came to the conclusion that in order to increase the level of investment attractiveness of domestic companies and the country as a whole, it is necessary to take into account psychological factors, as well as to improve the methodology for assessing investment attractiveness, which would take into account the expectations and «investment mood» of investors.

A Theory of Foreign Exchange Interventions

Abstract We study a real small open economy with two key ingredients (1) partial segmentation of home and foreign bond markets and (2) a pecuniary externality that makes the real exchange rate excessively volatile in response to capital flows. Partial segmentation implies that, by intervening in the bond markets, the central bank can affect the exchange rate and the spread between home- and foreign-bond yields. Such interventions allow the central bank to address the pecuniary externality, but they are also costly, as foreigners make carry trade profits. We analytically characterize the optimal intervention policy that solves this trade-off: (1) the optimal policy leans against the wind, stabilizing the exchange rate; (2) it involves smooth spreads but allows exchange rates to jump; (3) it partly relies on “forward guidance,” with non-zero interventions even after the shock has subsided; (4) it requires credibility, in that central banks do not intervene without commitment. Finally, we shed light on the global consequences of widespread interventions, using a multi-country extension of our model. We find that, left to themselves, countries over-accumulate reserves, reducing welfare and leading to inefficiently low world interest rates.

Role of Institutional Investors: Evidence from the Foreign Rule-144A Debt Market

We examine the unique role played by institutional investors in the private corporate debt market for Rule 144A debt. We use the recent global financial crisis as a quasi-natural experiment to study how qualified institutional buyers (QIBs) facilitated funding to the foreign debt issuers in U.S. Using an exhaustive sample of foreign bond issuances in the U.S. from over 65 countries between 1990 and 2013, we examine (a) corporate decisions involving debt choice and market timing, and (b) determination of offer spreads. Our findings collectively support the notion that QIBs enabled funding in the foreign 144A debt market despite the financial crisis.

International Yield Spillovers

<ns3:p>This paper investigates spillovers from foreign economies to the U.S. through changes in longterm Treasury yields. We document a decline in the contribution of U.S. domestic news to the variance of long-term Treasury yields and an increased importance of overnight yield changes—a rough proxy for the contribution of foreign shocks to U.S. yields—over the past decades. Using a model that identifies U.S., Euro area, and U.K. shocks that move global yields, we estimate that foreign (non-U.S.) shocks account for at least 20 percent of the daily variation in long-term U.S. yields in recent years. We argue that spillovers occur in large part through bond term premia by showing that a low level of foreign yields relative to U.S. yields predicts a decline in distant forward U.S. yields and higher returns on a strategy that is long on a long-term Treasury security and short on a long-term foreign bond.</ns3:p>