Impact of International capital flows on emerging markets' sovereign risk premium - demand vs. vulnerability effect

In recent years many developing economies attracted significant foreign capital. An increased share of non-residents in public debt affects sovereign bond yields in two opposing ways: triggering a downward pressure on yields in reaction to increased demand, and an upward pressure reflective of overreliance on external funding and greater vulnerability to sudden stops of capital inflows. Based on panel cointegration analysis of 14 emerging economies, this study - contrary to previous empirical literature - indicates that in the long run the positive-signed vulnerability effect may prevail over the negative-signed demand effect, though with significant heterogeneity across countries.