The Dynamics of Foreign Portfolio Investment and Exchange Rates: An Interconnection Approach in ASEAN

Abstract

This paper examines the spatial dependence of foreign portfolio investment (FPI) inflows among ASEAN countries in 2002Q1-2018Q4 utilizing the spatial econometric approach. This paper adds clarity to the identification of the true nature of portfolio investment performances. I show a competitive relationship among ASEAN countries, indicating crowding out of FPI in the host country is most likely to occur when the neighboring country is experiencing a crowding out. I also show that exchange rate volatility and changes, both in the host country and neighboring country, do not significantly affect FPI in the host country. Furthermore, I find that, aside from macroeconomic factors of the host country, foreign investors also consider the macroeconomic conditions in the neighboring country, suggesting the existence of spatial dependency. Robustness checks are conducted to confirm the main findings of this study.