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

Research output: Contribution to journalArticle

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

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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.",
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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. / Bhatta, Bibek; Marshall, Andrew; Thapa, Chandra.

In: The European Journal of Finance, Vol. 24, No. 7-8, 24.05.2018, p. 654-681.

Research output: Contribution to journalArticle

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