International Asset Allocations and Capital Flows: The Benchmark Effect

HKIMR Working Paper No.04/2015

67 Pages Posted: 17 Feb 2015

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: February 17, 2015

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.

Keywords: Benchmark Indexes, Contagion, Coordination Mechanism, ETFs, International Asset Prices, International Portfolio Flows, Mutual Funds

JEL Classification: F32, F36, G11, G15, G23

Suggested Citation

Raddatz, Claudio E. and Schmukler, Sergio and Williams, Tomás, International Asset Allocations and Capital Flows: The Benchmark Effect (February 17, 2015). HKIMR Working Paper No.04/2015. Available at SSRN: https://ssrn.com/abstract=2566093 or http://dx.doi.org/10.2139/ssrn.2566093

Claudio E. Raddatz

Central Bank of Chile ( email )

United States

World Bank ( email )

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

Sergio Schmukler (Contact Author)

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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