Portfolio investment and U.S. monetary policy announcements: An event study analysis using high-frequency data from Mexico

Marco Hernandez-Vega

doi:10.30585/jrems.v3i4.682

Abstract

We study how unconventional monetary policy announcements affected the entry of foreign investment in debt and equity in Mexico, placing special focus on announcements related to the third QE program and the taper tantrum episode. A novel dataset on daily debt and equity flows, that maps Balance of Payments data quite well, allows this paper to provide a better insight into movements of capital. The results suggest that both equity and debt flows reacted immediately to unexpected U.S. monetary policy announcements, particularly if these are considered as bad news by investors. In turn, results using weekly data support the idea that investors interested in fixed income instruments move more prudently than those interested in equity which react quickly.

Highlights

The end of the financial crisis let the world economy sailing across uncharted territory characterized, mainly, by close to zero interest rates and weak economic growth in advanced economies
After the implementation of several unconventional monetary policy measures (UMP) programs by the Federal Reserve (Fed)1 and other major central banks the world economy was left facing risks coming from the end of such programs and the normalization of monetary policy
The implementation of UMPs and close to zero interest rates in advanced economies led to a significant upsurge in portfolio flows to Mexico

Summary

Introduction

The end of the financial crisis let the world economy sailing across uncharted territory characterized, mainly, by close to zero interest rates and weak economic growth in advanced economies. Their central banks were forced to draw upon unconventional monetary policy measures (UMP) Such an environment motivated a “search for yield” behavior in international financial markets, leading to significant movements of capital towards emerging economies (EMEs). After the implementation of several UMP programs by the Federal Reserve (Fed) and other major central banks (the European Central Bank and the Bank of Japan, for example) the world economy was left facing risks coming from the end of such programs and the normalization of monetary policy. This posited significant challenges to emerging market economies, given the economic and financial implications of U.S monetary policy events. There is the financial turmoil observed back in mid-2013 when the Chair of the Board of Governors of the Fed at the time, Ben Bernanke, hinted at the possibility of tapering the third quantitative easing program, which resulted in most emerging economies suffering from a significant retrenchment of foreign capital. In addition, Journal of Research in Emerging Markets, 2021, 3(4)

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