Cross border investment in Asean+3: A gravity model approach to Asian bond market

Abstract

Using the established gravity model and the Coordinated Portfolio Investment Survey, the thesis studies the determinants of bilateral bond holdings in Asean+3. Financial sector development, macroeconomic factors, institution qualities and human capital are found to be significant factors that influence the level of bond holdings in the region. Capital control, in both host and source countries, are found to have a very detrimental effect on the bond market. On the other hand, countries which share a common language tend to receive share a higher level of bond holdings between them. The effects of the three countries on the regionb s bond holdings were also individually tested. Hong Kong was found to have a positive impact on the region through its financial sector. The territoryb s openness has also contributed to the level of bond holdings. Korea seems to have the greatest impact on the region, despite being only the 15th largest bond holder (in absolute value) in the region. However, Japan was found to have a relatively less influence on the growth of bond market in this region. The groupings for the Asian Bond Market were briefly tested in this thesis. The findings suggest that Asean+3, Asean+2 and even Asean+1 are arrangement that can bring about a positive influence on a bond market. Finally, Asean is found to be insufficient in creating a bond market on its own.