Working Paper: CEPR ID: DP17338
Authors: Xiang Fang; Bryan Hardy; Karen K. Lewis
Abstract: This paper studies the impact of investor composition on the sovereign debt market. We construct a data set of sovereign debt holdings by foreign and domestic bank, non-bank private, and official investors for 95 countries over twenty years. Private non-bank investors absorb disproportionately more sovereign debt supply than other investors. Moreover, non-bank investor demand is most responsive to the yield. Counterfactual analysis of emerging market sovereigns shows a 10\% increase in debt leads to a 6.7\% increase in costs, but an out-sized 9\% increase if non-bank investors are absent. We conclude that these sovereigns are vulnerable to losing non-bank investors.
Keywords: sovereign debt; investor demand; banks and nonbanks; advanced economies; emerging markets
JEL Codes: F34; G11; G15; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Sovereign Debt Increase (H63) | Borrowing Costs Increase (G32) |
| Sovereign Debt Increase (Nonbank Investors Absent) (H63) | Borrowing Costs Increase (G32) |
| Presence of Nonbank Investors (G21) | Mitigation of Borrowing Costs Increase (G32) |
| Nonbank Investor Demand (G21) | Responsiveness to Yield Changes (D21) |
| Investor Composition (G11) | Borrowing Costs for Sovereigns (F34) |