Investor Redemptions and Fund Manager Sales of Emerging Market Bonds: How are They Related?

52 Pages Posted: 25 Aug 2015

See all articles by Jimmy Shek

Jimmy Shek

Bank for International Settlements (BIS)

Ilhyock Shim

Bank for International Settlements (BIS)

Hyun Song Shin

Bank for International Settlements (BIS)

Date Written: August 2015

Abstract

Lending to emerging market economies (EMEs) through bond purchases has surged since 2009. What are the risks of a sudden stop? Bond mutual funds may curtail credit through two channels. The first is redemptions by ultimate investors. The second is additional discretionary sales by fund managers, over and above any sales implied by redemptions. In an empirical analysis of EME bond funds, we find that discretionary sales tend to reinforce the sales due to investor redemptions, and that 100 dollars' worth of bond sales due to investor redemptions is accompanied by roughly 10 dollars' worth of discretionary bond sales. We also find that 100 dollars' worth of EME international bond sales is associated with around 4 dollars' worth of valuation losses. Finally, a 1 percentage point increase in the yield of local currency bonds is associated with a 10% decline in the dollar value of bond holdings.

Keywords: Emerging market, sudden stop, financial crisis, global liquidity reversal, investor redemption

JEL Classification: G11, G15, G23

Suggested Citation

Shek, Jimmy and Shim, Ilhyock and Shin, Hyun Song, Investor Redemptions and Fund Manager Sales of Emerging Market Bonds: How are They Related? (August 2015). BIS Working Paper No. 509. Available at SSRN: https://ssrn.com/abstract=2650116

Jimmy Shek (Contact Author)

Bank for International Settlements (BIS) ( email )

Ilhyock Shim

Bank for International Settlements (BIS) ( email )

78F, Two International Finance Centre
8 Finance Street, Central
Hong Kong, n/a n/a
Hong Kong

HOME PAGE: http://www.bis.org/author/ilhyock_shim.htm

Hyun Song Shin

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

HOME PAGE: http://www.bis.org/author/hyun_song_shin.htm

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