Foreign investment dynamics: The impact of benchmark-driven versus unconstrained investors on local credit conditions

Oscar David Botero-Ramírez, Andrés Murcia and Mauricio Villamizar-Villegas

Working papers from Red Investigadores de Economía

Abstract: We examine the impact of foreign investor heterogeneity on local lending, focusing on Colombia from 2014 to 2023. Distinguishing between benchmark-driven and unconstrained investors, we highlight their differing responses to global and idiosyncratic shocks. Using bond-level data and the corporate credit registry, we link banks’ exposure to foreign flows with firm-level lending decisions. By decomposing Colombia’s weight in the J.P. Morgan GBI-EM index into valuation and exogenous components, we identify how investor behavior shapes bank balance sheets. Our main findings show that banks with greater exposure to unconstrained investors significantly expand lending during capital inflows, whereas those linked to benchmark-driven investors exhibit a more muted response. These results emphasize the role of investor composition in financial stability and provide key insights for policymakers in emerging markets.

Keywords: Capital flows; Foreign investment; Investor classification; J.P. Morgan GBI-EM index; Emerging markets (search for similar items in EconPapers)
JEL-codes: F3 F4 G01 G11 G12 G15 (search for similar items in EconPapers)
Pages: 47
Date: 2025-05
New Economics Papers: this item is included in nep-opm
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Working Paper: Foreign investment dynamics: The impact of benchmark-driven versus unconstrained investors on local credit conditions (2025)
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Persistent link: https://EconPapers.repec.org/RePEc:rie:riecdt:112

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