Sustainable Local Currency Debt: An Analysis of Foreigners’ Korea Treasury Bonds Investments Using a LA-VARX Model

Abstract

Foreign investors’ interest in Korean local currency bonds, and especially in Korea Treasury Bonds (KTBs) has increased significantly since the mid-2000s. This paper examines the determinants of foreign investors’ KTB investments by means of a lag-augmented vector autoregressive model with exogenous variables (LA-VARX). The model specification includes variables capturing the domestic, international, and risk factors. The risk factors are especially important in the context of South Korea since geopolitical tensions and economic policy uncertainty might adversely affect all investment decisions by foreigners. We find that expected return rates, country default risks, and global economic conditions have a significant impact on foreign investors’ KTB investment, but geopolitical risks have only a short-term negative impact. Our findings not for only provide a better understanding of the determinants of financial investments in South Korean financial markets, but they have broader implications in terms of the economic and social aspects of sustainability in South Korea. This is because KTBs provide a source of funding for the South Korean government for social projects and that KTBs are also held largely by long-term investors such as pension funds and insurers which require sTable Snd sustainable investments.

The Impact of ESG Management on Investment Decision: Institutional Investors’ Perceptions of Country-Specific ESG Criteria

“…For stable financing, it is important for companies to understand the perceptions of institutional investors, especially those with long-term investment propensity (Jang and Atukeren 2019). As Figure 8 shows, pension funds and insurers with long-term investment propensity have been shown to place high importance on shareholders' rights, risk and opportunity management, and CEO reputation.…”

“…South Korea is still classified as an emerging country by international rating agencies. However, as of August 2020, Korea belongs in the G10 in terms of GDP, has the 8th largest foreign exchange reserve in the world with $45.86 billion, and the financial market is well-developed and competitive (Jang and Atukeren 2019). In addition, South Korea's national credit rating is AA by S&P and Aa2 by Moody's, which is two notches higher than those of Japan and China.…”

A Study on Global Investors’ Criteria for Investment in the Local Currency Bond Markets Using AHP Methods: The Case of the Republic of Korea

“…Ahn et al (2010) and Kim (2011) analyzed stock price changes of inter-Korean news, and found that global investors were not sensitive to changes in inter-Korean relations. Jang and Atukeren (2019) also found that geopolitical risks on the Korean Peninsula affected global investors' investment in government bonds, but only in the short-term.…”

“…Bloom (2014); Basu and Bundick (2017) pointed out that economic policy uncertainties lead to a delay in corporate decision-making, decrease in corporate investments, and household spending, and rise in savings, which negatively affects the domestic economy. Jang and Atukeren (2019), however, claimed that economic policy uncertainties does not have a statistically significant impact on global investors' investment in KTBs.…”

“…Park and Kim (2013) concluded that the U.S. Fed's policy rate decision after the global financial crisis had a significant impact on the price of KTBs and market synchronization. Jang and Atukeren (2019) recently argued that rising bond yields may have a short-term negative impact to investors but a positive impact in the mid-to long-term. Estrella and Mishkin (1995) argued that the yield curve slope is a useful predictor of recession and found that short-term and long-term interest rates reversed during the U.S. recession.…”