Benchmark-Driven Investments in Emerging Market Bond Markets: Taking Stock

35 Pages Posted: 30 Oct 2020

See all articles by Serkan Arslanalp

Serkan Arslanalp

International Monetary Fund (IMF)

Dimitris Drakopoulos

affiliation not provided to SSRN

Rohit Goel

International Monetary Fund (IMF)

Robin Koepke

International Monetary Fund

Date Written: September 2020

Abstract

This paper reviews the role of benchmark-driven investments in EM local bond markets. We provide an overview of how key EM bond benchmark indices are constructed, how they affect the behavior of investment funds, and what are the likely implications for capital flows and policy-making. Several methods are presented suggesting that the amount of assets benchmarked against widely followed EM local-currency bond indices have risen fivefold since the mid-2000s to around $300 billion. Our review suggests that the benefits of index membership may be tempered by portfolio outflow risks for some countries. This is because benchmark-driven investments may increase the importance of external factors at the expense of domestic factors, raising the risks of outflows unrelated to recipient country fundamentals. Some countries may be disproportionately exposed to these risks, reflecting the way the indices are constructed.

Keywords: Emerging and frontier financial markets, Bonds, Mutual funds, Securities markets, Capital flows, WP, tag0, investment, graphic tag0, investor, JPMorgan

JEL Classification: G01, G11, G10, G23, F21

Suggested Citation

Arslanalp, Serkan and Drakopoulos, Dimitris and Goel, Rohit and Koepke, Robin, Benchmark-Driven Investments in Emerging Market Bond Markets: Taking Stock (September 2020). IMF Working Paper No. 20/192, Available at SSRN: https://ssrn.com/abstract=3721217

Serkan Arslanalp (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Dimitris Drakopoulos

affiliation not provided to SSRN

Rohit Goel

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Robin Koepke

International Monetary Fund ( email )

United States

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