ABSTRACT
This article investigates the determinants of the size of domestic bond market using economic, social and institutional factors. We expand the body of existing literature by suggesting that economic and social environment as well as institutional settings vary between developed and emerging economies. The article uses recent data from a wide range of countries, incorporates a variety of macroeconomic variables, social indicators and institutional factors to reassess the determinant of domestic bond markets. Robustness of the empirical analysis is established through both two-stage least squares and generalized method of movements techniques. The results of this article show that the size of the economy, breadth and depth of the banking system, the monetary policy stance, the degree of openness, the level of corruption, the degree of civil liberty and status of market access to investors, all play a crucial role in the determination of the size of the domestic bond market. We also find differences across developed and emerging market samples. The results are robust to different specifications and the corresponding estimation techniques.
Disclosure statement
No potential conflict of interest was reported by the authors.
Notes
1 See Obstfeld (Citation2009) for a detailed survey on the benefits of reforms and globalization.
5 This follows the empirical evidence provided in Burger and Warnock (Citation2006b), Geanne and Guscina (2006) and Abbas and Christensen (Citation2007). However, Mihaljek, Scatigna and Agustin (Citation2002) found the relationship to be weak during the period 1995–2000. For instance, they found Korea and Malaysia to have large domestic debt markets along with low inflation (Yartey, Citation2008; Reddy, 2002).
6 See Berth et al. (2004) for more details.
7 Hsiao (Citation1986) shows that the generalized least squares estimator for the random effects model, under an assumption of independence between the fixed effects and the explanatory variables, is biased.
8 Arellano and Bond (Citation1991) and Judson and Owen (Citation1999) provide more detail about one-step and two-step GMM estimators. Bond (Citation2002) highlights that many applied work using these GMM estimators has focused on results for the one-step estimators rather than the two-step estimators. The simulation study by Arellano and Bond (Citation1991) shows that a very modest gain in efficiency is observed using the two-step procedure, even in the presence of heteroscedasticity.
10 The results are not the same when GMM is used.
11 This is especially the case for Asian countries. See Mihaljek, Scatigna and Agustin (Citation2002) for details. It may be worth mentioning that the number of countries switching to inflation-targeting as a monetary policy tools increased significantly since this publication. The above article notes that inflation-indexed bonds are prominent in Chile and Israel.
12 Negative first-order serial correlation is expected in the first-differenced residuals if ![](//:0)
is serially uncorrelated.
Obstfeld, M. (2009). International Finance and Growth in Developing Countries: What Have We Learned? NBER Working Paper No. 14691, NBER, February. Shin, M. H. (2000). Opening Address, ADB Conference on Government Bond Markets and Financial Sector Development in developing Asia, Asian Development Bank, Manila, Philippines. Kim, Y. H. 2001. Government Bond Market Development, edited by Y. H. Kim. Manila: Asian Development Bank. Shah, A., and S. Thomas (2002) The Evolution of the Securities Markets in India in the 1990s, Indian Council for Research on International Economic Relations, Working Paper No. 91, New Delhi. Park, Y. C., and D. Park (2003) Creating Regional Bond Markets in East Asia: Rationale and Strategy, Paper presented at the 2nd Annual Conference of the PECC Finance Forum, Bangkok, Thailand. Jiang, G., and R. N. McCauley. 2004. “Asian Local Currency Bond Markets.” BIS Quarterly Review June. 66–79. Herring, R. J., and C. Nathporn. 2006. “The Case of Missing Market: The Bond Market and Why It Matters for Financial Development.” In Recent Financial Crises: Analysis, Challenges and Implications, edited by L. Klien and T. Shabbir, 148–196. U.K.: Edward Elgar Publishing company. Khalid, A. M. 2006. “Bond Market Developments in Emerging Markets: Prospects and Challenges for Pakistan.” SBP Research Bulletin 3: 43–62. Eduardo Borensztein, Kevin Cowan, Barry Eichengreen, and Ugo Panizza. 2008. “Building Bond Markets in Latin America.” In Bond Market in Latin America: On the Verge of a Big Bang, edited by Borensztein, et al., Cambridge, USA: The MIT Press. 1–28. Harwood, A. 2000. “Building Local Bond Markets: Some Issues and Actions.” In Building Local Bond Markets: An Asian Perspective, Ed A. Harwood, 1–38. Washington, DC: International Finance Corporation. World Bank. 2001. Developing Government Bond Markets: A Handbook. Washington DC: The International Bank for Reconstruction and development/The World Bank. Torre, A. T., J. C. Gozzi, and S. L. Schmukler. 2008. “Capital Market Development: Whither Latin America? in Financial Markets Volatility and Performance in Emerging Markets.” In National Bureau of Economic Research, edited by S. Edwards and M. G. P. Garcia, 121–153. Batten, J. A., and Y.-H. Kim (2000) Expanding Long-Term Financing through Bond Market Development: A Post Crisis Policy Task, Deakin University, Working Paper No. 2000_07, Melbourne, Australia. Cheung, S. Y. L., and B. Y. Cham. 2002. “Bond Markets in the Pacific Rim: Development, Market Structure and Relevant Issues in Fixed-Income Securities Markets.” Asia-Pacific Development Journal 9: 1–21. Eichengreen, B., and P. Luengnaruemitchai (2004). Why Doesn’t Asia Have Bigger Bond Markets? NBER Working Paper Series, Working Paper No. 10576, Cambridge. Mihaljek, D., M. Scatigna, and V. Agustin. 2002. “Recent Trends in Bond Markets in the Development of Bond Markets in Emerging Economies, Bank of International Settlement.” BIS Papers 11: 13–41. Mohanty, M. S. 2002. “Improving Liquidity in Government Bond Markets: What Can Be Done?.” BIS Papers 11: 49–80. Turner, P. 2002. “Bond Markets in Emerging Economies: An Overview of Policy Issues.” BIS Papers 11: 1–11. Plummer, M. G., and R. W. Click. 2005. “Bond Market Development and Integration in ASEAN.” International Journal of Finance & Economics 10: 133–142. doi:10.1002/ijfe.268. Burger, J. D., and F. E. Warnock (2006b) Local Currency Bond Markets, IMF Staff Papers Vol 53, International Monetary Fund, Washington D.C. Abbas, A., and J. Christensen (2007). The Role of Domestic Debt Markets in Economic Growth: An Empirical Investigation for Low-Income Countries, IMF Working Paper, WP/07/127, International Monetary Fund, Washington D.C. June. 10.5089/9781451866919.001 Mihaljek, D., M. Scatigna, and V. Agustin. 2002. “Recent Trends in Bond Markets in the Development of Bond Markets in Emerging Economies, Bank of International Settlement.” BIS Papers 11: 13–41. Yartey, C. A. (2008). The Determinants of Stock Market Development in Emerging Economies: Is South Africa Different? IMF Working Paper No. 08/32, International Monetary Fund, Washington D.C. February. 10.5089/9781451868944.001 Hsiao, C. 1986. Analysis of Panel Data. 1st ed. Cambridge: Cambridge University Press. Arellano, M., and S. R. Bond. 1991. “Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations.” Review of Economic Studies 58: 277–297. doi:10.2307/2297968. Judson, R. A., and A. L. Owen. 1999. “Estimating Dynamic Panel Data Models: A Guide for Macroeconomists.” Economics Letters 65: 9–15. doi:10.1016/S0165-1765(99)00130-5. Bond, S. (2002) Dynamic Panel Data Models: A Guide to Microdata Methods and Practice, Centre for Microdata Methods and Practice (CEMMAP), Working paper CWP09/02, Institute for Fiscal Studies, Department of Economics, UCL, London. Arellano, M., and S. R. Bond. 1991. “Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations.” Review of Economic Studies 58: 277–297. doi:10.2307/2297968. Rose, A. K., and M. M. Spiegel (2015). Domestic Bond Market and Inflation, Federal Reserve Bank of San Francesco Working Paper Series, Working Paper 2015-05, February.FEDERAL RESERVE BANK OF SAN FRANCISCO WORKING PAPER SERIES Mihaljek, D., M. Scatigna, and V. Agustin. 2002. “Recent Trends in Bond Markets in the Development of Bond Markets in Emerging Economies, Bank of International Settlement.” BIS Papers 11: 13–41.