Nonresident Capital Flows and Volatility: Evidence from Malaysia's Local Currency Bond Market

Abstract

Malaysia's local currency debt market is one of the most liquid public debt markets in theworld. In recent years, the growing share of nonresident holders of debt has been a source ofconcern for policymakers as a reason behind exchange rate volatility. The paper provides anoverview of the recent developments in the conventional debt market. It builds an empiricaltwo-stage model to estimate the main drivers of debt capital flows to Malaysia. Finally, it usesa GARCH model to test the hypothesis that nonresident flows are behind the observedexchange rate volatility. The results suggest that the public debt market in Malaysia respondsadequately to both pull and push factors and find no firm evidence that nonresident flows causevolatility in the onshore foreign exchange market.

Keywords: Malaysia, Asia and Pacific, Debt markets, International financial markets, nonresident investors, volatility, Asset Pricing

JEL Classification: G12, G15