Toggle Mobile Menu
Academic Programs

Borrowing cost of emerging market economies (EMEs) is heavily influenced by fluctuations of risk appetites of global investors. This paper provides a creditor-oriented view: sovereign yield sensitivity to global factors is closely related to sectoral composition of international investors. Using high-frequency, granular administrative data on holdings of EME sovereign bonds, I show that banks, insurance companies, and pension funds (ICPFs) exhibit strong currency and credit quality bias when allocating capital to EME securities, effectively creating market segmentation. An investor base tilted towards investment funds amplifies the impact of elevated global risk aversion on yield, and dampens it otherwise. Currency and rating bias of banks and ICPFs further lead to heterogeneous propensities of banks and ICPFs to supply liquidity to bonds with different characteristics when bond price declines, a finding I uncover using an instrumental variable strategy based on mutual fund flows. A quantitative model of partially segmented markets and preferred-habitat investors is able to generate substantial heterogeneity in bond price sensitivity to capital flight shocks from asset managers.