Determinants of Capital Flows in the Korean Bond Market

We find the determinants of capital ows into the Korean bond market in this study. We categorize the investors into four groups which are sovereign wealth funds, central banks, private funds, and private banks to nd the major factors that affect each group for their decision in investing in the Korean bond market. The results with ARDL (Autoregressive Distributed Lags) models show that the strongest factor of foreign capital arriving in the market is the foreign currency reserves of major central banks. The global risk aversion, growth rate differentials, country-specific risk factors are also important depending on investors. We also take a look at the interest rate differentials (IRDs) between Korea and the US. Even though, IRDs are supposedly significant factors for capital flows, there are little evidences that they actually are. We try to dene the underlying reasons behind these findings as well. The potential reasons can be the introduction of macro-prudential measures such as regulations on leverage ratios for international banks, the investors risk management, and increasing capital flows out of foreign currency reserves owned by major central banks around the world.