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

Bibek Bhatta, Andrew Marshall, Chandra Thapa

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    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.
    Original languageEnglish
    Pages (from-to)654-681
    Number of pages28
    JournalThe European Journal of Finance
    Volume24
    Issue number7-8
    Early online date30 Jun 2017
    DOIs
    Publication statusPublished - 24 May 2018

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