The long and the short of emerging market debt, Vol. 1 of 1

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The long and the short of emerging market debt

Author:	Opazo, Luis; Raddatz, Claudio; Schmukler, Sergio L.;	Collection Title:	Policy Research working paper ; no. WPS 5056
Country:	Chile;	Date Stored:	2009/09/16
Document Date:	2009/09/01	Document Type:	Policy Research Working Paper
Language:	English	Region:	Latin America & Caribbean
Report Number:	WPS5056	SubTopics:	Emerging Markets; Debt Markets; ; Deposit Insurance; Investment and Investment Climate
Volume No:	1 of 1

Summary: Emerging economies have tried to promote long-term debt because it reduces maturity mismatches and the probability of crises. This paper uses unique evidence from the leading case of Chile to study to what extent there is domestic demand for long-term instruments. The authors analyze monthly asset-level portfolios of Chilean institutional investors (mutual funds, pension funds, and insurance companies) and compare their maturity structure to that of US bond mutual funds. Despite being thought to invest long term, Chilean asset-management institutions (mutual and pension funds) hold large amounts of short-term assets relative to US mutual funds and Chilean insurance companies. Short-termism is not driven by lack of instrument availability or tactical behavior. Instead, it seems to be explained by the desire to minimize inflation risk and, more importantly, by manager incentives that tilt demand toward short-term instruments. Extending the maturity of emerging market debt may require reducing risk and reshaping investor incentives.


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