“Capital Inflows, Sovereign Debt and Bank Lending: Micro-Evidence from an Emerging Market”. Revised and Resubmitted at the Review of Financial Studies.
This paper uses a natural experiment to show that government access to foreign credit increases private access to credit. I identify a sudden, unanticipated, and arguably exogenous increase in capital inflows to the sovereign debt market in Colombia. This was due to J.P. Morgan’s inclusion of Colombian bonds into its emerging markets local currency government debt index, which led to an increase in the share of sovereign debt held by foreigners from 8.5 to 19 percent. This event had significant and heterogeneous effects on Colombia’s commercial banks: banks that acted as market makers in the treasury market reduced their sovereign debt holdings by 7.8 percentage points of assets and increased their commercial credit availability by 4.2 percentage points of assets compared to the rest of the banks. The differential increase in credit was around 2 percent of GDP. Industry level evidence suggests that this had positive effects on the real economy. A higher exposure to market makers led to a higher growth in employment, production, sales and GDP.
“Capital Flows and Sovereign Debt Markets: Evidence from Index Rebalancings”, with Lorenzo Pandolfi. Revise and Resubmit (2nd Round) at the Journal of Financial Economics.
In this paper we analyze how government bond prices and liquidity are affected by capital flows to the sovereign debt market. Additionally, we explore whether these flows spill over to the exchange rate market. To tackle endogeneity concerns, we construct a measure of informationfree capital flows implied by mechanical rebalancings (FIR) from the largest local-currency government-debt index for emerging countries. We find that FIR is positively associated with the returns on government bonds and with the depth of the sovereign debt market in the aftermath of the rebalancings. These capital flows also impact on the exchange rate market: larger inflows (outflows) are associated to larger currency appreciations (depreciations).
“How ETFs Amplify the Global Financial Cycle in Emerging Markets”, with Nathan Converse and Eduardo Levy Yeyati.
Since the early 2000s exchange-traded funds (ETFs) have grown to become an important investment vehicle worldwide. In this paper, we study how their growth affects the sensitivity of international capital flows to the global financial cycle. We combine comprehensive micro-level data on investor flows with a novel identification strategy that controls for unobservable time-varying economic conditions at the investment destination. For the emerging market universe, we find that the sensitivity of investor flows to global risk factors for equity (bond) ETFs is 1.5 (1.25) times higher than for equity (bond) mutual funds. In turn, we show that countries where ETFs hold a larger share of financial assets are significantly more sensitive to global risk factors, both in terms of total equity flows and prices. We conclude that the growing participation of ETFs amplifies the incidence of the global financial cycle in emerging markets.