Korea Trade Review (무역학회지)

Korea Trade Research Association (한국무역학회)
권호 표지
DOI QR코드

DOI QR Code

Debt Investment Outflows and Inflows in Korea and Covered Interest Parity Deviation

채권시장 자본유출입과 무위험 금리평형 이탈

  • Gab-Je Jo (Department of Economics & Finance, Keimyung University)
  • 조갑제 (계명대학교 경제금융학과)
  • Received : 2022.02.09
  • Accepted : 2022.02.26
  • Published : 2022.02.28
Download PDF
⟨ Previous Next ⟩

Abstract

This paper investigates the arbitrage effect by the covered interest parity (CIP) deviation, as well as other push or pull factor effect on capital inflows and ouflows in the Korean bond market, by utilizing OLS, TSLS, IRF and VDC in EC model. The sample period covers February 2002 to December 2020. It is found that, the swap basis reflecting the CIP deviations have the significant effects on both debt investment inflows and debt investment outflows. Also, it is found that, the Korean risk factors have decreasing effects on foreigner's investment in the Korean bonds, while the global risk factors have decreasing effects on Korean resident's investment in the foreign bonds.

Keywords

References

  1. Ahmed, S. and A. Zlate (2014), "Capital Flows to Emerging Market Economies: A Brave New World?" Journal of International Money and Finance, 48, 221-245. https://doi.org/10.1016/j.jimonfin.2014.05.015
  2. Ammera, J., Claessens, S., Tabova, A., Wroblewski, C. (2019), "Home country interest rates and international investment in U.S. bonds", Journal of International Money and Finance, 95, 212-227 https://doi.org/10.1016/j.jimonfin.2018.06.010
  3. Akram, Q. Farooq, Dagfinn Rime, and Lucio Sarno. (2008), "Arbitrage in the foreign exchange market: Turning on the microscope", Journal of International Economics, 6(2), 237-253.
  4. Baba, N., Packer, F., and Nagano, T. (2008), "The spillover of money market turbulence to FX swap and cross-currency swap markets", BIS Quarterly Review, March.
  5. Baba, N. and Packer, F. (2009). "Interpreting deviations from covered interest parity during the financial market turmoil of 2007-08", Journal of Banking and Finance, 33(11), 1953-1962. https://doi.org/10.1016/j.jbankfin.2009.05.007
  6. Bernanke, B S (2017), "Federal Reserve policy in an international context", IMF Economic Review, 65, 1-32. https://doi.org/10.1057/imfer.2016.8
  7. Borio, C.E., McCauley, R.N., and McGuire, P. (2017), "FX swaps and forwards: missing global debt?" BIS Quarterly Review, September.
  8. Brauning, Falk, and Kovid Puria. (2017), "Uncovering covered interest parity: The role of bank regulation and monetary policy", Federal Reserve Bank of Boston Current Policy Perspectives, 2017(3).
  9. Cerutti, E, M Obstfeld and H Zhou (2020), "Covered interest parity deviations: Macro-financial determinants", CEPR Discussion Paper, no. 13886
  10. Du, W, B Hebert and A W Huber (2019), "Are intermediary constraints priced?", NBER Working Paper, no. 26009, 2019(June).
  11. Forbes, Kristin J., Warnock, Francis E., (2012), "Capital flow waves: surges, stops, flight, and retrenchment", Journal of International Economics, 88(2), 235-251. https://doi.org/10.1016/j.jinteco.2012.03.006
  12. Frenkel, J.A., and Levich, R. (1975), Covered interest arbitrage: unexploited profits?, Journal of Political Economy, 83, 325-338.
  13. Frenkel, J.A., and Levich, R. (1977), "Transaction costs and interest arbitrage: tranquil versus turbulent periods", Journal of Political Economy, 85, 1209-1226. https://doi.org/10.1086/260633
  14. Iida, T., Kimura, T., and Sudo, N. (2018), "Deviations from Covered Interest Rate Parity", International Journal of Central Banking, 14(4), 275-325
  15. Johansen, S. (1995), Likelihood-Based Inference in Cointegrated Vector Autoregressive Models, Oxford: Oxford University Press.
  16. Kang, Tae-Soo , Young-Sik Jeong, Kyunghun Kim, and Eunjung Kang (2019), The Impact of the Residents' Foreign Portfolio Investments on Foreign Exchange Market, KIEP Working Paper, no. 19-10
  17. Kim, Jeong-Han, Dae-Ki Lee (2010), Determinants of Foreigners' Korean Bond Investment, KIF Finance Study, no. 2010-3
  18. Koepke, R. (2019), "What Drives Capital Flows To Emerging Markets? A Survey Of The Empirical Literature", Journal of Economic Surveys, 33(2), 516-540. https://doi.org/10.1111/joes.12273
  19. Lee, Myongjong (2019), "A Study on the Determinants of Foreign Investors' Domestic Bond Investment", Korean Journal of Financial Engineering, 18(3), 59-83. https://doi.org/10.35527/KFEDOI.2019.18.3.003
  20. Liao, Gordon. (2019), "Credit migration and covered interest rate parity", Board of Governors of the Federal Reserve System International Finance Discussion Papers, no. D2019-152, August 2019
  21. McCormick, F. (1979), "Covered Interest Arbitage: Unexploited Profits? Comment", Journal of Political Economy, 87, 411-417.
  22. Won, Seung-Yeon, Sangyong Joo (2009), "A Study on the Determinants of Foreigners' Domestic Bond Investment and their Impacts on the Korean Bond Market", The Korean Economic Review, 57(3), 31-65.
  23. Yang, Yang-Hyun, Hye-Lim Lee (2008). "Study on Arbitrage Incentives and Korean Bond Investment by Foreigners", Monthly Bulletin, Bank of Korea, August, 55-89
  24. Yim, Byung-Jin, Byung-Hak Leem (2004), "A Study on the American Bond Portfolio Hedge of Pension Fund with T-Bond Futures by OLS, VECM and GARCH Model", Journal of Industrial Economics and Business, 17(3), 703-720.
  25. Yu, Bok-Keun (2018), Analysis of Changes in Determinants of Foreigners' Bond Investment before and after the Global Financial Crisis: The Case of Korea, BOK Working Paper, no. 2018-18, Bank of Korea.