Search-for-Yield and Home Bias under Quantitative Easing

Abstract

This study analyzes the impact of investors' search-for-yield behavior on home bias in the bond market. We conduct a regression analysis using data from 27 countries, including both developed and emerging economies, for 2001–2021. We use two types of home bias indicators as dependent variables and the yield on 5-year government bonds denominated in the local currency as independent variables to analyze search-for-yield behavior. Considering that central banks in many countries, including major advanced economies, have made substantial domestic bond purchases over the past 20 years, we examine the effect of excluding central banks' domestic bond holdings from the home bias calculation. The results show that, with a few exceptions, both domestic and foreign investors in advanced and emerging economies tend to increase their demand for higheryield bonds, which is consistent with the search-for-yield behavior. This trend is further reinforced when the central banks' domestic bond holdings are excluded. Specifically, we found that the significance of bond yields for foreign investors' home bias in emerging economies increased after the global financial crisis. This indicates that emerging economies became more attractive to yieldseeking investors in a post-crisis low-interest-rate environment. In addition, by excluding the domestic bond holdings of central banks from the home bias calculation, we observed a higher coefficient of bond yields for the home bias of domestic investors in advanced economies. This suggests that when excluded, central banks' substantial domestic bond holdings in developed countries allow investors' decisions to be better reflected in the country's overall asset composition.