Emerging Market Portfolio Flows: The Role of Benchmark-Driven Investors

26 Pages Posted: 26 May 2016

See all articles by Serkan Arslanalp

Serkan Arslanalp

International Monetary Fund (IMF)

Takahiro Tsuda

International Monetary Fund (IMF)

Date Written: December 2015

Abstract

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.

Keywords: Portfolio Choice, Investment Decisions, markets, currency, investors, government debt, debt, General, All Countries, and Investment Decisions,

JEL Classification: F30, G01, G11, F3

Suggested Citation

Arslanalp, Serkan and Tsuda, Takahiro, Emerging Market Portfolio Flows: The Role of Benchmark-Driven Investors (December 2015). IMF Working Paper No. 15/263, Available at SSRN: https://ssrn.com/abstract=2784634

Serkan Arslanalp (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Takahiro Tsuda

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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