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Open AccessArticle

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

by Jae Young Jang 1,2,* and Erdal Atukeren 2,*
1
Seoul Business School, aSSIST, 46 Ewhayeodae 2-gil, Seodaemun-gu, Seoul 03767, Korea
2
BSL Business School Lausanne, Rte. de la Maladière 21, P.O. Box, CH—1022 Chavannes (VD), Switzerland
*
Authors to whom correspondence should be addressed.
Sustainability 2019, 11(13), 3603; https://doi.org/10.3390/su11133603
Received: 6 June 2019 / Revised: 26 June 2019 / Accepted: 27 June 2019 / Published: 30 June 2019
(This article belongs to the Special Issue Application of Time Series Analyses in Business)
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 and sustainable investments. View Full-Text
Keywords: South Korea; Korea Treasury Bonds (KTBs); geopolitical risk; economic policy uncertainty; lag-augmented VAR (LA-VAR) South Korea; Korea Treasury Bonds (KTBs); geopolitical risk; economic policy uncertainty; lag-augmented VAR (LA-VAR)
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Jang, J.Y.; Atukeren, E. Sustainable Local Currency Debt: An Analysis of Foreigners’ Korea Treasury Bonds Investments Using a LA-VARX Model. Sustainability 2019, 11, 3603.

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