policy on local currency sovereign yields.

Although the baseline might already incorporate global factors through the share of foreign investors, we control for the U.S. 10-year term premia based on Adrian and Crump (2013), excluding the observation of the United States from the sample.<sup>22</sup>

# **3.2.2 Country-specific factors**

Robustness check 2 (excluding exchange rate risk): The baseline includes both the share of foreign investors and expected exchange depreciation as independent variables. Although we take a lagged value of the share of foreign investors, it may decline due to expected exchange depreciation if they exhibit forward-looking behavior. Given possible multicollinearity between these two variables, we exclude expected exchange depreciation.

Robustness check 3 (controlling for net foreign assets position): Following Brzoza-Brzezina and Kotlowski (2018), we control for the lagged net foreign assets to GDP ratio _푁퐹퐴푖,푡_ −1. Reinhart and Trebesch (2015) argue that an increase in the share of foreign investors is associated with lower long-term interest rates, as these holdings supplement domestic savings in capital-scarce countries. By contrast, a chronic excess of saving over investments may cause low real interest rates.

Robustness check 4 (controlling for capital control): Capital control would lower sovereign risk because the regulation of capital flows may possibly prevent crises (Wright (2006)). Fernández et al. (2016) construct an index of capital control restrictions for bond inflow and outflow. Hence, we add this capital control dummy variable _퐶퐶푖,푡_ −1 as an additional robustness check.

Robustness check 5 (controlling for short-term interest rate): We employ forward interest rates to omit any effects of current economic conditions. However, if current monetary policy affects forward interest rates, omitted variable bias would occur due to misspecification. Hence, we control for the one-year zero coupon rate

# _푆푇푅푖,푡_ .

> 22We directly control for U.S. monetary conditions. However, as a manifestation of the investors’ risk-taking behavior amid low interest rates of advanced economies, the “search-for-yield” could cause the share of private foreign investors to increase in emerging markets. Moore et al. (2013) show that a 1 percentage point drop in the US 10-year Treasury bond yield leads on average to a 4.2 percentage point increase in foreign holdings of government bonds in emerging markets. Therefore, future research could control for U.S. monetary conditions indirectly by using the instrumental variables to deal with the endogeneity of the share of foreign investors without taking a lagged value. However, Yu (2013) finds inconsistency in the two-step-least-squares estimators in threshold models when the threshold variable is endogenous. Caner and Hansen (2004) use two-step least square estimators in the threshold model where they allow for endogenous regressors, but they assume the threshold variable to be exogenous. Furthermore, Yu (2013) points out that the estimator based on a misspecified reduced form is inconsistent even if the threshold variable is exogenous. Employing instrumental variables is an interesting future topic for research.

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