Cost of sovereign debt and foreign bias in bond allocations

Bibek Bhatta, Andrew Marshall, Chandra Thapa

Research output: Contribution to journalArticle

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Abstract

Finance theory suggests that markets where foreign bond portfolio investors overweight their portfolio relative to the prescribed theoretical benchmark should experience higher international risk sharing. Correspondingly, the cost of debt in such markets should be lower compared to markets facing a lower degree of international risk sharing. We empirically examine this prediction using a panel data set of sovereign bond yield spreads and a measure of suboptimal foreign bond portfolio allocations for 50 emerging and ten developed markets. Consistent with theory, our results show higher levels of foreign bond allocations – relative to the theoretical benchmark – are negatively related to the cost of debt. These results have important policy implications as a country’s cost of debt could potentially be lowered by encouraging foreign portfolio investors to hold their optimal allocation.
Original languageEnglish
Pages (from-to)75-91
Number of pages17
JournalJournal of International Financial Markets, Institutions and Money
Volume51
Early online date13 Sep 2017
DOIs
Publication statusPublished - Nov 2017

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Costs
Sovereign debt
Cost of debt
Benchmark
International risk sharing
Investors
Bond portfolio
Prediction
Policy implications
Sovereign bonds
Yield spread
Bond yields
Panel data
Optimal allocation
Finance
Portfolio allocation

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Bhatta, Bibek ; Marshall, Andrew ; Thapa, Chandra. / Cost of sovereign debt and foreign bias in bond allocations. In: Journal of International Financial Markets, Institutions and Money. 2017 ; Vol. 51. pp. 75-91.
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Cost of sovereign debt and foreign bias in bond allocations. / Bhatta, Bibek; Marshall, Andrew; Thapa, Chandra.

In: Journal of International Financial Markets, Institutions and Money, Vol. 51, 11.2017, p. 75-91.

Research output: Contribution to journalArticle

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