Horioka, Charles Yuji Nomoto, Takaaki Terada-Hagiwara, Akiko
Year of Publication:
ADB Working Paper Series on Regional Economic Integration 124
In this paper, we analyze data on trends since 2000 in foreign holdings of government securities and other debt securities, with emphasis on Japan and developing Asia. We find that foreign residents generally increased their holdings of Asian debt securities during the sample period and in particular during the post-global financial crisis (GFC) period. Meanwhile, foreign holdings of debt securities have been declining in the eurozone. Foreign holdings of short-term debt securities were very volatile during the GFC period (2009–11), with a sharp drop in foreign holdings of short-term Asian debt securities that was followed by a renewed surge. Our empirical analysis suggests that despite the increase in foreign holdings of debt securities its share is still far lower than the optimal portfolio warranted by the capital asset pricing market theory. In other words, foreign investors’ home bias is still strong. The overall increase in foreign holdings of Asian debt securities appears to be driven by relatively stable exchange rates and the higher risk-adjusted returns on the debt securities of the region. Additionally, we find that investors were more "home-biased" during the GFC period and invested less in the markets of the major industrialized economies.
Government debt government securities government bonds government bills government notes debt securities debt financing debt holdings foreign debt holdings international capital flows short-term capital movements cross-border portfolio investments safe haven home bias capital asset pricing model optimal portfolios global financial crisis eurozone Japan developing Asia