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The Long And The Short Of Emerging Market Debt

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Author Info
Luis Opazo
Claudio Raddatz
Sergio Schmukler

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Abstract

Emerging economies have tried to promote long-term debt since it reduces maturity mismatches and the probability of crises. This paper uses unique evidence from the leading case of Chile to study to what extent there is domestic demand for long-term instruments. We analyze monthly asset-level portfolios of Chilean institutional investors (mutual funds, pension funds, and insurance companies) and compare their maturity structure to that of US bond mutual funds. Despite being thought to invest long term, Chilean asset-management institutions (mutual and pension funds) hold large amounts of short-term assets relative to US mutual funds and Chilean insurance companies. Shorttermism is not driven by lack of instrument availability or tactical behavior. Instead, it seems to be explained by the desire to minimize inflation risk and, more importantly, by manager incentives that tilt demand toward short-term instruments. Extending the maturity of emerging market debt may require reducing risk and reshaping investor incentives.

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Paper provided by Central Bank of Chile in its series Working Papers Central Bank of Chile with number 530.

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Date of creation: Oct 2009
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Handle: RePEc:chb:bcchwp:530

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  5. Schmukler, Sergio L. & Vesperoni, Esteban, 2006. "Financial globalization and debt maturity in emerging economies," Journal of Development Economics, Elsevier, vol. 79(1), pages 183-207, February. [Downloadable!] (restricted)
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  9. Kaminsky, Graciela & Lyons, Richard K. & Schmukler, Sergio L., 2004. "Managers, investors, and crises: mutual fund strategies in emerging markets," Journal of International Economics, Elsevier, vol. 64(1), pages 113-134, October. [Downloadable!] (restricted)
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