Foreign bias in bond portfolio investments: the role of economic and non-economic factors and the impact of the global financial and sovereign debt crises

Research output: Contribution to journalArticle

Abstract

In this study, we examine whether theoretically inconsistent foreign bond allocations are associated with economic fundamentals and/or non-economic behavioural factors. Using panel data for 54 developed and emerging markets spanning a temporal period of 12 years, the results show that non-economic factors, i.e. familiarity with foreign markets and behavioural characteristics of source markets, are the stronger drivers of biases in foreign bond allocations. Further, using the recent 2009-11 European sovereign debt crisis as an experimental set-up, we find that investors reduce their foreign bond allocations during the debt crisis, with the withdrawals being more severe from the most affected countries. We also find that the relevance of familiarity with foreign markets becomes more pronounced during the European debt crisis. However, in case of the recent 2007-09 global financial crisis, we find no evidence of change in foreign bias by international bond investors.
LanguageEnglish
Pages654-681
Number of pages28
JournalEuropean Journal of Finance
Volume24
Issue number7-8
Early online date30 Jun 2017
DOIs
Publication statusE-pub ahead of print - 30 Jun 2017

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Economics
Portfolio investment
Factors
Bond portfolio
Sovereign debt crises
Investors
Debt crisis
Familiarity
Global financial crisis
Emerging markets
Economic fundamentals
Panel data

Keywords

  • economic factors
  • international bond allocations
  • foreign bias
  • non-economic factors
  • global financial crisis
  • sovereign debt crisis

Cite this

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title = "Foreign bias in bond portfolio investments: the role of economic and non-economic factors and the impact of the global financial and sovereign debt crises",
abstract = "In this study, we examine whether theoretically inconsistent foreign bond allocations are associated with economic fundamentals and/or non-economic behavioural factors. Using panel data for 54 developed and emerging markets spanning a temporal period of 12 years, the results show that non-economic factors, i.e. familiarity with foreign markets and behavioural characteristics of source markets, are the stronger drivers of biases in foreign bond allocations. Further, using the recent 2009-11 European sovereign debt crisis as an experimental set-up, we find that investors reduce their foreign bond allocations during the debt crisis, with the withdrawals being more severe from the most affected countries. We also find that the relevance of familiarity with foreign markets becomes more pronounced during the European debt crisis. However, in case of the recent 2007-09 global financial crisis, we find no evidence of change in foreign bias by international bond investors.",
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author = "Bibek Bhatta and Andrew Marshall and Chandra Thapa",
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