Capital Flows and Sovereign Debt Markets: Evidence from Index Rebalancings

Tomas Williams and Lorenzo Pandolfi

Working Papers from The George Washington University, Institute for International Economic Policy

Abstract: In this paper we analyze how government bond prices and liquidity are affected by capital flows to the sovereign debt market. Additionally, we explore whether these flows spill over to the exchange rate market. To tackle endogeneity concerns, we construct a measure of information- free capital flows implied by mechanical rebalancings (FIR) from the largest local-currency government-debt index for emerging countries. We find that FIR is positively associated with the returns on government bonds and with the depth of the sovereign debt market in the aftermath of the rebalancings. These capital flows also impact on the exchange rate market: larger inflows (outflows) are associated to larger currency appreciations (depreciations).

Keywords: sovereign debt; international capital flows; index rebalancings; mutual funds; benchmark in- dexes; exchange rate (search for similar items in EconPapers)
JEL-codes: F32 G11 G12 G15 G23 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2017-11
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Citations: View citations in EconPapers (2)

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http://www2.gwu.edu/~iiep/assets/docs/papers/2017WP/WilliamsIIEPWP2017-11.pdf (application/pdf)

Related works:
Journal Article: Capital flows and sovereign debt markets: Evidence from index rebalancings (2019)
Working Paper: Capital Flows and Sovereign Debt Markets: Evidence from Index Rebalancings (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:gwi:wpaper:2017-11

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