International Asset Allocations and Capital Flows: The Benchmark Effect

59 Pages Posted: 20 Apr 2016

See all articles by Claudio E. Raddatz

Claudio E. Raddatz

Central Bank of Chile; World Bank

Sergio L. Schmukler

World Bank - Development Research Group (DECRG)

Tomás Williams

George Washington University - Department of Economics; George Washington University - Elliott School of International Affairs (ESIA)

Multiple version iconThere are 2 versions of this paper

Date Written: May 1, 2014

Abstract

This paper studies channels through which well-known benchmark indexes impact asset allocations and capital flows across countries. The study uses unique monthly micro-level data of benchmark compositions and mutual fund investments during 1996-2012. Benchmarks have important effects on equity and bond mutual fund portfolios across funds with different degrees of activism. Benchmarks explain, on average, around 70 percent of country allocations and have significant impact even on active funds. Benchmark effects are important after controlling for industry, macroeconomic, and country-specific, time-varying effects. Reverse causality does not drive the results. Exogenous, pre-announced changes in benchmarks result in movements in asset allocations mostly when these changes are implemented (not when announced). By impacting country allocations, benchmarks affect capital flows across countries through direct and indirect channels, including contagion. They explain apparently counterintuitive movements in capital flows, generating outflows from countries when upgraded and with large market capitalization and better relative performance.

Keywords: Mutual Funds, Debt Markets, Economic Theory & Research, Information Security & Privacy, Emerging Markets

Suggested Citation

Raddatz, Claudio E. and Schmukler, Sergio and Williams, Tomás, International Asset Allocations and Capital Flows: The Benchmark Effect (May 1, 2014). World Bank Policy Research Working Paper No. 6866. Available at SSRN: https://ssrn.com/abstract=2437178

Claudio E. Raddatz (Contact Author)

Central Bank of Chile ( email )

United States

World Bank ( email )

1818 H Street, N.W.
Washington, DC 20433
United States

Sergio Schmukler

World Bank - Development Research Group (DECRG) ( email )

1818 H. Street, N.W.
MSN MC 3-301
Washington, DC 20433
United States
202-458-4167 (Phone)
202-522-3518 (Fax)

HOME PAGE: http://www.worldbank.org/en/about/people/s/sergio-schmukler

Tomás Williams

George Washington University - Department of Economics ( email )

Monroe Hall, Suite 340
2115 G Street, NW
Washington, DC 20052
United States

George Washington University - Elliott School of International Affairs (ESIA) ( email )

2201 G Street, N.W.
Washington, DC 20052
United States

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