Emerging Market Portfolio Flows: The Role of Benchmark-Driven Investors
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Summary:
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.
Series:
Working Paper No. 2015/263
Subject:
Bonds Emerging and frontier financial markets Financial institutions Financial markets Inflation-indexed bonds Securities markets Sovereign bonds
English
Publication Date:
December 17, 2015
ISBN/ISSN:
9781513570655/1018-5941
Stock No:
WPIEA2015263
Pages:
25
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