Capital flows and sovereign debt markets: Evidence from index rebalancings

Lorenzo Pandolfi and Tomas Williams

Journal of Financial Economics, 2019, vol. 132, issue 2, 384-403

Abstract: We analyze how capital flows into the sovereign debt market affect government bond prices, liquidity, and exchange rates. To address endogeneity concerns, we construct a measure of informationless capital Flows Implied by (mechanical) Rebalancings (FIR) in the largest emerging markets local currency government debt index. FIR is associated with higher returns and greater depth in the sovereign debt market after the rebalancings. Also, larger inflows (outflows) are associated with greater currency appreciations (depreciations). Our results highlight the increasing importance of capital flows driven by demand shocks, due to the growing relevance of benchmark indexes as the preferred habitat for institutional investors.

Keywords: Sovereign debt; International capital flows; Index rebalancings; Mutual funds; Benchmark indexes (search for similar items in EconPapers)
JEL-codes: F32 G11 G12 G15 G23 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (30)

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Related works:
Working Paper: Capital Flows and Sovereign Debt Markets: Evidence from Index Rebalancings (2017)
Working Paper: Capital Flows and Sovereign Debt Markets: Evidence from Index Rebalancings (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:132:y:2019:i:2:p:384-403

DOI: 10.1016/j.jfineco.2018.10.008

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