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

Author/Editor:

Serkan Arslanalp ; Dimitris Drakopoulos ; Rohit Goel ; Robin Koepke

Publication Date:

September 25, 2020

Electronic Access:

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Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary:

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.

Series:

Working Paper No. 20/192

Frequency:

regular

English

Publication Date:

September 25, 2020

ISBN/ISSN:

9781513557588/1018-5941

Stock No:

WPIEA2020192

Format:

Paper

Pages:

34

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