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Capital Flows and Sovereign Debt Markets: Evidence from Index Rebalancings

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  • Tomas Williams

    (George Washington University)

  • Lorenzo Pandolfi

    (Universitat Pompeu Fabra)

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).

Suggested Citation

  • Tomas Williams & Lorenzo Pandolfi, 2017. "Capital Flows and Sovereign Debt Markets: Evidence from Index Rebalancings," Working Papers 2017-11, The George Washington University, Institute for International Economic Policy.
    • Handle: RePEc:gwi:wpaper:2017-11
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    Cited by:

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    2. Bathia, Deven & Bouras, Christos & Demirer, Riza & Gupta, Rangan, 2020. "Cross-border capital flows and return dynamics in emerging stock markets: Relative roles of equity and debt flows," Journal of International Money and Finance, Elsevier, vol. 109(C).
    3. Fernando Broner & Alberto Martin & Lorenzo Pandolfi & Tomas Williams, 2019. "Winners and losers from Sovereign debt inflows: evidence from the stock market," Economics Working Papers 1693, Department of Economics and Business, Universitat Pompeu Fabra.
    4. Aldasoro, Iñaki & Beltrán, Paula & Grinberg, Federico & Mancini-Griffoli, Tommaso, 2023. "The macro-financial effects of international bank lending on emerging markets," Journal of International Economics, Elsevier, vol. 142(C).
    5. Bank for International Settlements, 2021. "Changing patterns of capital flows," CGFS Papers, Bank for International Settlements, number 66, december.
    6. Mariana Escobar & Lorenzo Pandolfi & Alvaro Pedraza & Tomas Williams, 2021. "The Anatomy of Index Rebalancings: Evidence from Transaction Data," CSEF Working Papers 621, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy, revised 12 2021.
    7. Maggiori, Matteo, 2021. "International Macroeconomics With Imperfect Financial Markets," SocArXiv z8g6r, Center for Open Science.
    8. Antonelli, Stefano & Corneli, Flavia & Ferriani, Fabrizio & Gazzani, Andrea, 2022. "Benchmark effects from the inclusion of Chinese A-shares in the MSCI EM index," Economics Letters, Elsevier, vol. 216(C).
    9. Hillary Stein, 2022. "Got Milk? The Effect of Export Price Shocks on Exchange Rates," Working Papers 23-1, Federal Reserve Bank of Boston.
    10. Bayront Yudit Rumondor & Pakasa Bary, 2020. "Capital Flows and Bank Risk-Taking Behavior: Evidence From Indonesia," Journal of Central Banking Theory and Practice, Central bank of Montenegro, vol. 9(special i), pages 33-53.
    11. Charles W. Calomiris & Mauricio Larrain & Sergio L. Schmukler & Tomas Williams, 2019. "Search for Yield in Large International Corporate Bonds: Investor Behavior and Firm Responses," NBER Working Papers 25979, National Bureau of Economic Research, Inc.
    12. Calomiris, Charles W. & Larrain, Mauricio & Schmukler, Sergio L. & Williams, Tomas, 2022. "Large international corporate bonds: Investor behavior and firm responses," Journal of International Economics, Elsevier, vol. 137(C).
    13. Matteo Maggiori, 2021. "FX policy when financial markets are imperfect," BIS Working Papers 942, Bank for International Settlements.
    14. Broner, Fernando & Martin, Alberto & Pandolfi, Lorenzo & Williams, Tomas, 2021. "Winners and losers from sovereign debt inflows," Journal of International Economics, Elsevier, vol. 130(C).
    15. Masahiro Inoguchi, 2021. "The impact of foreign capital flows on long‐term interest rates in emerging and advanced economies," Review of International Economics, Wiley Blackwell, vol. 29(2), pages 268-295, May.
    16. De Rossi, Giuliano & Steliaros, Michael, 2022. "The Shift from Active to Passive and its Effect on Intraday Stock Dynamics," Journal of Banking & Finance, Elsevier, vol. 143(C).
    17. Lucas A. Mariani & Silvia Marchesi, 2023. "International Lending Channel, Bank Heterogeneity and Capital Inflows (Mis)Allocation," Working Papers 887, Economic Research Southern Africa.

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    More about this item

    Keywords

    sovereign debt; international capital flows; index rebalancings; mutual funds; benchmark in- dexes; exchange rate;
    All these keywords.

    JEL classification:

    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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