Benchmark Inclusion and Sovereign Risk

Sat, 01 Mar 2025 02:17:20 +0000

I study how financial benchmark index inclusion affects sovereign bond markets and sovereign risk. The project examines whether being included in widely followed bond indices changes investor demand, capital flows, and borrowing costs for sovereign governments. A local copy is open access here.

Built a country-month panel dataset combining sovereign bond yields, sovereign spreads, benchmark index membership, index weights, and mutual fund holdings data. The dataset links global investment benchmarks to actual portfolio allocation decisions and sovereign debt market outcomes.
Used event study methods to examine how sovereign bond markets respond around benchmark inclusion and exclusion events. This approach helps identify whether changes in index status are associated with shifts in bond yields, spreads, and investor demand.
Developed a shift-share instrumental variable strategy based on benchmark exposure and global index-tracking flows. This method uses variation in countries’ exposure to benchmark-driven demand to estimate the effect of foreign investor demand on sovereign borrowing costs.
Estimated foreign demand elasticity for sovereign bonds by analyzing how global investors reallocate portfolios when benchmark weights change. This helps quantify how sensitive sovereign debt prices are to changes in institutional investor demand.
Examined spillover and network effects across countries by studying how index-driven capital flows affect not only included countries, but also countries that compete for global portfolio investment. This highlights the broader market consequences of benchmark-based investing.
Connected the empirical analysis to a sovereign credit risk framework to interpret how financial integration, investor demand, and benchmark inclusion can affect sovereign risk premia.

Default Risk Modeling on Jeremy Meng

Benchmark Inclusion and Sovereign Risk