Preliminary and incomplete Investing in Local Currency Bond Markets

We assess the extent to which emerging markets have been able to attract global investors to their local currency bond markets. To do so, we first provide a sense of the playing field by examining the surge in the development of local currency bond markets over the past decade, as well as the historical returns characteristics faced by global investors. We then present a model in which investors care about barriers to investment as well as the mean, variance, and skewness of expected returns. Empirical tests suggest that the dominant factor is a new measure of investability; cross-border participation in local currency bonds is highest in countries where investor-friendly institutions and policies have been established. Finally, we discuss the link between our findings and global financial stability. In particular, both increased bond market development and greater foreign participation are paths toward ameliorating imbalances associated with financial crises in the 1990s and more recently