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Capital Flows and Sovereign Debt Markets: Evidence from Index Rebalancings

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Abstract

In this paper, we analyze how capital flows into the sovereign debt market affect government bond prices and liquidity. Additionally, we explore whether these flows spill over to the exchange rate. To address endogeneity concerns, we construct a measure of informationless capital Flows Implied by (mechanical) Rebalancings (FIR) in the largest local currency government debt index for emerging countries. We find that FIR is associated with higher returns on bonds and greater depth in the sovereign debt market after the rebalancings. These capital flows also impact the exchange rate market; larger inflows (outflows) are associated with greater currency appreciations (depreciations).

Suggested Citation

  • 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.
  • Handle: RePEc:sef:csefwp:487
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    Cited by:

    1. Deven Bathia & Christos Bouras & Riza Demirer & Rangan Gupta, 2019. "Cross-Border Capital Flows and Return Dynamics in Emerging Stock Markets: Relative Roles of Equity and Debt Flows," Working Papers 201937, University of Pretoria, Department of Economics.

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    Keywords

    sovereign debt; international capital flows; index rebalancings; mutual funds; benchmark indexes; exchange rate.;

    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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