Abstract
Orientation: This study examined the main predictors of net foreign portfolio investment volatility in low-income Southern African Development Community (SADC) countries. Based on the World Bank data (July 2014), the selected countries are Zimbabwe, Zambia, Malawi, Lesotho, Madagascar, Mozambique, DRC, Swaziland and Tanzania. Research purpose: The purpose of this study is to establish the main drivers of net foreign portfolio investment volatility in low-income SADC countries. Motivation for the study: This study is also motivated by mixed findings in foreign portfolio investment debate on why capital flows are more volatile and difficult to manage in developing than in advanced economies. Although it is acknowledge that developing markets are characterised by the poor quality of financial institutions in economies with weak macroeconomic fundamentals, which ultimately pose a greater risk of sudden stops or reversal of foreign portfolio flows, findings remain inconclusive on what actually drives net foreign portfolio investment volatility in low-income countries. Research approach/design and method: The Panel Autoregressive Distributed Lag (P-ARDL) model is employed to determine the short- and long-run drivers of such investment volatility in these countries. The study uses quarterly data for the period spanning 2000 to 2015. Main findings: The findings reveal that all the variables in the model, namely money supply, world output, general prices, real gross domestic product, domestic interest rates and international interest rates, are significant predictors of net foreign portfolio investment volatility. However, positive long-run effects are observed from world gross domestic product, real gross domestic product, prices and money supply, whilst domestic interest rates and international interest rates displayed a negative association in the long run. These findings are consistent with both the economic literature and the empirical literature, which suggest that an increase in interest rates or higher interest rates affects foreign portfolio investment. Similarly, in the short run, all the variables employed in the model are the main predictors of net foreign portfolio investment volatility in low-income SADC countries. Practical/managerial implications: Policy-makers should embark on policies and programs that promote economic performance in order to attract stable foreign portfolio flows that will lead to stable markets and reduce volatility in the economy. Policy consistency is thus, recommended to attract investors to the region and ensure that stock and bond markets are viable and stable. Contribution/value-add: Unlike other existing studies, the measure of volatility employed in this is considered superior as it is based on net portfolio flows which reflect changes in an economy’s overall current account position. The study informs and advances the current discourse on the causes of capital flow volatility in the field of investment theory and practice.
Highlights
Over the past three decades, developing economies have become more integrated with global financial markets, largely driven by global trade and capital account liberalisation (Alfaro, Kalemli-Ozcan & Volosovych 2007; Broto, Díaz-Cassou & Erce 2011; Neumann, Penl & Tanku 2009)
Kaltenbrunner and Painceira (2015) and other scholars note that the changing nature of capital flows to developing and emerging markets because of financial integration has exposed these economies to new forms of vulnerability, volatile financial flows and exchange rate fluctuations
In the estimation of the main predictors of net foreign portfolio investment flows in low-income Southern African Development Community (SADC) economies, the results from the Panel Autoregressive Distributed Lag (P-ARDL) show that in the long run, all the variables in the model are statistically significant in explaining net foreign portfolio investment volatility in SADC countries
Summary
Over the past three decades, developing economies have become more integrated with global financial markets, largely driven by global trade and capital account liberalisation (Alfaro, Kalemli-Ozcan & Volosovych 2007; Broto, Díaz-Cassou & Erce 2011; Neumann, Penl & Tanku 2009). Net foreign portfolio investment flows refer to the difference between net portfolio inflows from international investors buying domestic financial assets, and the net volatility is more powerful and less persistent and has less serial correlation because it is calculated from the absolute values of residuals in line with Broto et al (2011) and Engle and Rangel (2008), unlike estimates from the rolling window standard deviation or Generalised Autoregressive Conditional Heteroscedasticity (GARCH 1,1) methods. The objective of this study is to ascertain and explain the main predictors of foreign portfolio investment volatility in low-income SADC countries It follows Rafindadi and Yosuf (2013), Hegerty (2011), Al Mamun, Sohog and Akhter (2013) and Mohaddes and Raissi (2014) in utilising Chudik and Pesaran’s P-ARDL model (2013).
Sign-in/Register to view highlights & summary Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
