Foreign bond investment and the yield curve

초록

Market participants have argued that the yield curve in the Korean bond market has been increasingly flattened since 2007 caused partly by foreign investors' rapidly growing investment in Korean bond market, motivated to take advantage of market imperfections seeking riskless profit making opportunities. To analyze how much foreign bond investments have affected the bond yields in Korea, in this paper I utilize a stylized affine term structure model that has an observable factor related with foreign bond investments as well as latent factors. I find supportive evidence for the argument by market participants that investment by foreigners has been an important factor behind the flattening of the yield curve since 2007. Taking out the effects of foreign bond investment on the yields, I observe much a weakened yield flattening phenomenon.

키워드