Determinants of Capital Flows in the Korean Bond Market

This study shows that interest rate differentials have minor impacts on overall capital flows into the Korean bond market. They are significant factors for private bank capital, however only for short-term interest rates, which takes up ignorable amounts in total capital balances. The most impressive factor is the foreign currency reserves owned by major central banks; these are particularly influential to capital flows throughout the sectors. Global and local risk indicators can also explain the variation of capital flows by sector. The underlying reasons behind these findings are as follows: changes in the proportions of sectoral capital balances after the global financial crisis, introduction of regulations on leverage ratios for international banks, risk management by investors, and increasing flows from foreign currency reserves of major central banks