Emerging Market Portfolio Flows: The Role of Benchmark-Driven Investors

Serkan Arslanalp and Takahiro Tsuda

No 2015/263, IMF Working Papers from International Monetary Fund

Abstract: Portfolio flows to emerging markets (EMs) tend to be correlated. A possible explanation is the role global benchmarks play in allocating capital internationally, the so-called “benchmark effect.” This paper finds that benchmark-driven investors indeed play a large role in a key segment of the market—the EM local currency government bond market—, accounting for more than one third of total foreign holdings as of end-2014. We find that the prominence of these investors declined somewhat after the May 2013 taper tantrum, but remain high. This distinction is important in understanding the drivers of EM capital flows and their sensitivity to different types of shocks. In particular, a high share of benchmark-driven investors may result in capital flows that are more sensitive to global shocks and less sensitive to country factors.

Keywords: WP; emerging market; investor; Government Bond Index-Emerging market; index; International Finance; Financial Crises; Portfolio Choice; Investment Decisions; bond indices; investor base; Citi emerging markets government bond Index; EM investor; emerging market market portfolio; EM index; investment universe; Sovereign bonds; Securities markets; Inflation-indexed bonds; Bonds; Emerging and frontier financial markets; Global (search for similar items in EconPapers)
Pages: 25
Date: 2015-12-17
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (27)

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