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The effects of financial risk components on local-currency bond markets: theory and empirical evidence

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Abstract

Based on the ARDL and error correction modelling, we investigate the impacts of financial risk factors on Saudi government bond market over the period 1990–2020. The results indicate that foreign debt stability, debt service stability, and international liquidity stability negatively affected public bond market capitalization (PBMC) in the short run. However, in the long run international liquidity stability does not appear to play a major role in the development of Saudi public bond market, while foreign debt stability constitutes an important factor encouraging government to issue bonds. Moreover, current account and exchange rate stability is positively correlated to PBMC in the long run, highlighting that stable current account and less volatile exchange rates are generally associated with larger local-currency bond markets. Based on these results, the study suggests that multiplying efforts toward new policies in managing financial risk aspects of bonds, mainly those related to international liquidity and debt service, are likely to enhance financial stability, thereby contributing to a greater and deeper domestic bond market.

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Data availability

Data will be available only on reasonable request from the authors.

Notes

  1. The term “spare tire” is due to Alan Greenspan (1999) in a well-known speech where he evokes an alternative for corporations to the bank lending.

  2. The maturity and currency mismatches were seen as the direct consequence of the "original sin" of emerging market economies (EMEs). According to Eichengreen et al. (2003), due to EMEs’ structural weaknesses and lack of market credibility foreign investors tend to lend to EMEs only in foreign currencies.

  3. A summarizing detailed guide of names and definitions of the different variables used in measuring financial risk components are available in the ICRG guide to data variables document (https://www.prsgroup.com/wp-content/uploads/2014/08/icrgmethodology.pdf).

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  1. Department of Economics, Faculty of Economic Sciences and Management, University of Tunis El Manar, Tunis, Tunisia

    Jamel Boukhatem

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Boukhatem, J. The effects of financial risk components on local-currency bond markets: theory and empirical evidence. SN Bus Econ 4, 41 (2024). https://doi.org/10.1007/s43546-024-00642-5

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