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Search-for-Yield and Home Bias under Quantitative Easing

Author

Listed:
  • Hiroya Tanaka

    (Kyoto University)

  • Keiichi Hori

    (Kwansei Gakuin University)

  • Akihisa Shibata

    (Kyoto University)

Abstract
This study analyzes the impact of investors' search-for-yield behavior on home bias in the bond market. We conduct a regression analysis using data from 27 countries, including both developed and emerging economies, for 2001-2021. We use two types of home bias indicators as dependent variables and the yield on 5-year government bonds denominated in the local currency as independent variables to analyze search-for-yield behavior. Considering that central banks in many countries, including major advanced economies, have made substantial domestic bond purchases over the past 20 years, we examine the effect of excluding central banks' domestic bond holdings from the home bias calculation. The results show that, with a few exceptions, both domestic and foreign investors in advanced and emerging economies tend to increase their demand for higher-yield bonds, which is consistent with the search-for-yield behavior. This trend is further reinforced when the central banks' domestic bond holdings are excluded. Specifically, we found that the significance of bond yields for foreign investors' home bias in emerging economies increased after the global financial crisis. This indicates that emerging economies became more attractive to yield-seeking investors in a post-crisis low-interest-rate environment. In addition, by excluding the domestic bond holdings of central banks from the home bias calculation, we observed a higher coefficient of bond yields for the home bias of domestic investors in advanced economies. This suggests that when excluded, central banks' substantial domestic bond holdings in developed countries allow investors' decisions to be better reflected in the country's overall asset composition.

Suggested Citation

  • Hiroya Tanaka & Keiichi Hori & Akihisa Shibata, 2024. "Search-for-Yield and Home Bias under Quantitative Easing," KIER Working Papers 1106, Kyoto University, Institute of Economic Research.
    • Handle: RePEc:kyo:wpaper:1106
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    References listed on IDEAS

    as
    1. Park, Donghyun & Taniguchi, Kiyoshi & Tian, Shu, 2019. "Determinants of foreign and domestic investment bias in global bond markets: Some empirical evidence," The North American Journal of Economics and Finance, Elsevier, vol. 49(C), pages 287-303.
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    5. Oshima, Katsuhiro, 2020. "Search for yield and business cycles," The North American Journal of Economics and Finance, Elsevier, vol. 54(C).
    6. Charles Yuji Horioka, 2024. "The Feldstein–Horioka Puzzle or Paradox after 44 years: a fallacy of composition," The Japanese Economic Review, Springer, vol. 75(3), pages 383-404, July.
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    More about this item

    Keywords

    search for yield; monetary policy; home bias; foreign bond investment; portfolio selection;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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