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

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  • Serkan Arslanalp
  • Takahiro Tsuda

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.

Suggested Citation

  • Serkan Arslanalp & Takahiro Tsuda, 2015. "Emerging Market Portfolio Flows; The Role of Benchmark-Driven Investors," IMF Working Papers 15/263, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:15/263
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    References listed on IDEAS

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    1. Levy Yeyati, Eduardo & Williams, Tomas, 2012. "Emerging economies in the 2000s: Real decoupling and financial recoupling," Journal of International Money and Finance, Elsevier, vol. 31(8), pages 2102-2126.
    2. Raddatz, Claudio & Schmukler, Sergio L. & Williams, Tomás, 2017. "International asset allocations and capital flows: The benchmark effect," Journal of International Economics, Elsevier, vol. 108(C), pages 413-430.
    3. Koepke, Robin, 2015. "What Drives Capital Flows to Emerging Markets? A Survey of the Empirical Literature," MPRA Paper 62770, University Library of Munich, Germany.
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    Keywords

    International finance; Financial crises; Portfolio Choice; Investment Decisions; markets; currency; investors; government debt; debt; General; All Countries; and Investment Decisions;

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