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International asset allocations and capital flows : the benchmark effect, Volume 1
 
Author:Raddatz, Claudio; Schmukler, Sergio L.; Williams, Tomas; Country:World;
Date Stored:2014/05/14Document Date:2014/05/01
Document Type:Policy Research Working PaperSubTopics:Information Security & Privacy; Economic Theory & Research; Emerging Markets; Debt Markets; Mutual Funds
Language:EnglishMajor Sector:Finance
Rel. Proj ID:1W-Capital Flows And Financial Integration -- -- P053639;Region:The World Region
Report Number:WPS6866Sub Sectors:General finance sector
Collection Title:Policy Research working paper ; no. WPS 6866Paper is funded by the Knowledge for Change Program (KCP)TF No/Name:TF015108-KCP II - Firm Financing from Capital Markets; TF092859-KCP - CAPITAL RAISING ACTIVITY IN DOMESTIC AND INTERNATIONAL MARKETS; TF098583-KCP II - On the use of domestic and international debt markets; BBRSB-BB RESEARCH SUPPORT BUDGET; TF040198-WORLD:; TF094565-KCP II - GLOBALIZATION, RISK, AND CRISES; TF010688-KCP II - Understanding Capital Flows to Developing Countries; TF040145-WORLD:; TF015022-KCP II - Institutional Investors; TF092864-CAUSES AND CONSEQUENCES OF MACROECONOMIC VOLATILITY
Volume No:1  

Summary: 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.

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