Nonresident Capital Flows and Volatility: Evidence from Malaysia’s Local Currency Bond Market

IMF Working Papers, January 25, 2019

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Malaysia’s local currency debt market is described as one of the most liquid public debt markets in the world.
Growing share of nonresident holders of debt has been a source of concern for policymakers as a potential driver of exchange rate volatility.
The paper provides an overview of recent developments in the conventional debt market, builds an empirical two-stage model to estimate the main drivers of debt capital flows to Malaysia, and uses a GARCH model to test whether nonresident flows drive exchange rate volatility.

Empirical two-stage model to estimate main drivers of debt capital flows to Malaysia.
GARCH model employed to test the hypothesis that nonresident flows are behind observed exchange rate volatility.

The public debt market in Malaysia responds adequately to both pull and push factors.
The analysis finds no firm evidence that nonresident flows cause volatility in the onshore foreign exchange market.

Subjects: Bond yields, Currency markets, Emerging and frontier financial markets, Exchange rates, Financial institutions, Financial markets, Foreign exchange, Global financial crisis of 2008-2009, Securities markets
Keywords: bond market, Bond yields, Currency markets, debt market, debt market flow, debt markets, Emerging and frontier financial markets, Exchange rates, FX market measure, Global, global bond market integration, liquidity condition, Malaysia, MGS market, nonresident investors, Securities markets, volatility, WP

Nonresident Capital Flows and Volatility: Evidence from Malaysia’s Local Currency Bond Market — David A. Grigorian, January 25, 2019.