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Author(s) / Editor(s): 
  • José Antonio Ocampo
  • Germán D. Orbegozo
  • Mauricio Villamizar-Villegas

Post-graduation from the original sin problem The effects of market participation on sovereign debt markets

La serie Borradores de Economía, de la Subgerencia de Estudios Económicos del Banco de la República, contribuye a la difusión y promoción de la investigación realizada por los empleados de la institución. En múltiples ocasiones estos trabajos han sido el resultado de la colaboración con personas de otras instituciones nacionales o internacionales. Esta serie se encuentra indexada en Research Papers in Economics (RePEc).

Publicado el: 
Friday, 17 April 2020

The opinions contained in this document are the sole responsibility of the author and do not commit Banco de la República or its Board of Directors.

 

Abstract

 

We evaluate the effects of the sovereign debt structure by examining various degrees of bond market participation and diversification within different bond maturities and investor type. We use a unique Colombian panel dataset, comprised of all government bond maturities in the hands of public and private institutions during 2006-2018. For identification, we propose an instrumental variable  approach, specific to each investor group. We find that an increase in non-residents’ market share of a 1 percentage point reduces bond yields by 35% and lowers volatility by 0.8%, relative to their mean values. Alternatively, we see an opposite effect for both pension funds and the banking sector. Finally, we find that market concentration makes local-currency yields more sensitive to global financial shocks.