The Long and the Short of Emerging Market Debt

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 domestic institutional investors hold longterm instruments. We compare monthly asset-level portfolios of Chilean institutional investors (mutual funds, pension funds, and insurance companies) among them and with 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 Chilean insurance companies and US mutual funds. The large heterogeneity across maturity structures is not driven by the supply side of debt or tactical behavior. Instead, it seems to be explained by risk factors and manager incentives, driven by agency problems that tilt portfolios toward short-term instruments. Extending the maturity of emerging market debt might require reducing risk and reshaping incentives among financial intermediaries..