Abstract This paper studies whether investor composition affects the sovereign debt market. We construct a data set of sovereign debt holdings by foreign and domestic bank, nonbank private and official investors for 101 countries across three decades. Compared with other investors, private nonbank investors absorb a disproportionate share of the debt supply, and their demand for emerging market debt is most price responsive. A counterfactual analysis of emerging market sovereigns shows a 10% increase in debt leads to a 5.8% yield increase but an outsized 8.4% increase without nonbank investors. We conclude that sovereigns are vulnerable to the loss of nonbanks.

Foreign exchange returns exhibit behavior difficult to reconcile with standard theoretical models. This article asks whether the recent findings of long swings in exchange rates between appreciating and depreciating periods affect estimates of the foreign exchange risk premium. We demonstrate how the “peso problem” introduced by expected shifts in exchange rate regimes can affect inferences about the risk premium in at least two ways: (1) it can make the foreign exchange risk premium appear to contain a permanent disturbance when it does not; and (2) it can induce bias in the foreign exchange return regressions such as in Fama (1984).

This study investigates the role of liquidity in pricing stock returns in the Hong Kong stock market. Our results show that liquidity is an important factor for pricing returns in Hong Kong after taking well-documented asset pricing factors into consideration. The results are robust to adding portfolio residuals and higher moment factor in the factor models. The results are also robust to seasonality, and conditional-market tests. We also compare alternative factor models and find that the liquidity four-factor model (market excess return, size, book-to-market ratio, and liquidity) is the best model to explain stock returns in the Hong Kong stock market, while the momentum factor is not found to be priced.

We develop an international financial market model in which domestic and foreign residents differ in their beliefs about the information content in public signals. We determine how informational advantages of domestic investors in the interpretation of home public signals affect equity markets. We evaluate the ability of our model to generate four international-finance anomalies: (i) the co-movement of returns and capital flows, (ii) home-equity preference, (iii) the dependence of firm returns on home and foreign factors, and (iv) abnormal returns around foreign firm cross-listing in the home market. Their relationships with empirical differences-of-opinion proxies are consistent with the model. Received January 15, 2011; editorial decision May 16, 2016 by Editor Geert Bekaert.

ABSTRACT Recent empirical studies suggest that nominal interest rates and expected inflation do not move together one‐for‐one in the long run, a finding at odds with many theoretical models. This article shows that these results can be deceptive when the process followed by inflation shifts infrequently. We characterize the shifts in inflation by a Markov switching model. Based upon this model's forecasts, we reexamine the long‐run relationship between nominal interest rates and inflation. Interestingly, we are unable to reject the hypothesis that in the long run nominal interest rates reflect expected inflation one‐for‐one.

Recent empirical studies suggest that nominal interest rates and expected inflation do not move together one-for-one in the long run, a finding at odds with many theoretical models. This article shows that these results can be deceptive when the process followed by inflation shifts infrequently. The authors characterize the shifts in inflation by a Markov switching model. Based upon this model's forecasts, they reexamine the long-run relationship between nominal interest rates and inflation. Interestingly, the authors are unable to reject the hypothesis that, in the long run, nominal interest rates reflect expected inflation one-for-one. Copyright 1995 by American Finance Association.