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International Asset Allocations and Capital Flows: The Benchmark Effect

Author

Listed:
  • Claudio Raddatz

    (Central Bank of Chile)

  • Sergio L. Schmukler

    (World Bank and Hong Kong Institute for Monetary Research)

  • Tomas Williams

    (Universitat Pompeu Fabra)

Abstract

We study different channels through which well-known benchmark indexes impact asset allocations, capital flows, and asset prices across countries, using unique monthly micro-level data of benchmark compositions and mutual fund investments during 1996-2014. Benchmarks are useful for identification and have important effects on equity and bond mutual fund portfolios, including both passive and active funds. Benchmark effects are important after controlling for industry, macroeconomic, and country-specific time-varying effects. Reverse causality and common shocks do not drive the results. Exogenous, pre-announced changes in benchmarks result in movements in asset allocations and capital flows mostly when these changes are implemented. Moreover, assets in the benchmarks experience abnormal returns when benchmark changes become effective, suggesting that the reallocations implied by those changes are not immediately arbitraged away. By impacting country allocations, benchmarks explain apparently counterintuitive movements in capital flows and asset prices, for example, generating outflows and depressing prices in countries being upgraded.

Suggested Citation

  • Claudio Raddatz & Sergio L. Schmukler & Tomas Williams, 2015. "International Asset Allocations and Capital Flows: The Benchmark Effect," Working Papers 042015, Hong Kong Institute for Monetary Research.
  • Handle: RePEc:hkm:wpaper:042015
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    Cited by:

    1. Lorenzo Pandolfi & Tomas Williams, 2017. "Capital Flows and Sovereign Debt Markets: Evidence from Index Rebalancings," CSEF Working Papers 487, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
    2. Danny Cassimon & Dennis Essers & Karel Verbeke, 2016. "The changing face of Rwanda's public debt," BeFinD Working Papers 0114, University of Namur, Department of Economics.
    3. Tomas Williams, 2017. "Capital Inflows, Sovereign Debt and Bank Lending: Micro-Evidence from an Emerging Market," Working Papers 2017-12, The George Washington University, Institute for International Economic Policy.
    4. Augusto de la Torre & Guillermo Beylis & Jaime de Piniés, "undated". "International Flows to Latin America--Rocking the Boat? LAC Semiannual Report, April 2014," World Bank Other Operational Studies 18029, The World Bank.
    5. repec:eee:inecon:v:108:y:2017:i:c:p:413-430 is not listed on IDEAS
    6. Raddatz, Claudio & Schmukler, Sergio L. & Williams, Tomás, 2017. "International asset allocations and capital flows: The benchmark effect," Journal of International Economics, Elsevier, pages 413-430.
    7. repec:eee:intfin:v:51:y:2017:i:c:p:75-91 is not listed on IDEAS
    8. repec:eee:ememar:v:32:y:2017:i:c:p:1-27 is not listed on IDEAS
    9. Serkan Arslanalp & Takahiro Tsuda, 2015. "Emerging Market Portfolio Flows; The Role of Benchmark-Driven Investors," IMF Working Papers 15/263, International Monetary Fund.
    10. Ken Miyajima & Ilhyock Shim, 2014. "Asset managers in emerging market economies," BIS Quarterly Review, Bank for International Settlements, September.
    11. Jimmy Shek & Ilhyock Shim & Hyun Song Shin, 2015. "Investor redemptions and fund manager sales of emerging market bonds: how are they related?," BIS Working Papers 509, Bank for International Settlements.

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    Keywords

    Benchmark Indexes; Contagion; Coordination Mechanism; ETFs; International Asset Prices; International Portfolio Flows; Mutual Funds;

    JEL classification:

    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • 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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