Delegating discipline: how indexes restructured the political economy of sovereign bond markets

Benjamin Cormier and Natalya Naqvi

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: Outside of the rich world, international financial markets are thought to discipline borrowing governments by monitoring political and economic characteristics. But increasingly, asset managers do not assess individual country risk/return profiles. They replicate benchmark indexes, delegating investment decisions to index providers. This has two effects. First, it relocates market discipline into the hands of index providers. Second, it alters the constraints sovereigns face when accessing bond markets, conditioning the relationship between a sovereign’s political-economic features and its ability to raise capital. Using a novel data set of index inclusion and weights, we show that country-specific factors traditionally associated with bond market access do not have the expected constraining effects on countries included in a major index but do continue to affect excluded countries. Index investment has profoundly restructured debt markets by circumscribing the disciplinary link between country characteristics and capital allocation, with wide-ranging implications for the political economy of debt and finance.

JEL-codes: H62 (search for similar items in EconPapers)
Pages: 15 pages
Date: 2023-10-01
New Economics Papers: this item is included in nep-fdg, nep-ifn and nep-pol
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Published in Journal of Politics, 1, October, 2023, 85(4), pp. 1501 - 1515. ISSN: 0022-3816

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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:117248

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