Net Equity Flows Research Articles

The asymmetric impacts of international portfolio flows on Australian dollar returns

ABSTRACT This study investigates how equity portfolio flows affect the transition processes of exchange rate returns in Australia by employing a Markov-switching AR-GARCH-Jump model with time-varying transition probabilities. Three interesting findings are observed. Firstly, both GARCH and jump effects are totally different in the high-volatility and low-volatility states. Secondly, the net equity portfolio inflows increase exchange rate market fluctuations. Thirdly, the marginal effect of net equity flows is stronger in low-volatility state than in high-volatile state.

Do Lower Foreign Flows and Higher Domestic Flows Reduce Indian Equity Market Volatility?

This study examines the relationship that both domestic and foreign institutional net equity flows have with the India stock markets. The motivation behind is the study to examine whether increased net equity investments from domestic institutional investors has reduced the influence of foreign equity flows on the Indian stock market volatility. Our results indicate that only during periods in which domestic equity inflows surpass foreign flows by a significant margin, as seen during 2015–2018, is the Indian stock market volatility not significantly influenced by foreign equity investments. However, during periods of re-emergence of strong foreign net inflows, the Indian market volatility is still being impacted significantly, as has been observed since 2019. Furthermore, we find that both large-scale net buying and net selling by domestic funds increased the stock market volatility as observed during 2015–2018 and COVID-impacted year 2020 respectively. The implications of this study are multi-fold. First, the regulators should discuss with industry bodies before enforcing major structural changes like reconstituting of mutual fund investment mandate in 2017 which forced domestic funds to quickly change portfolio allocation amongst large-cap, mid-cap and small-cap stocks resulting in higher stock market volatility. Second, adequate investor educational and awareness programmes need to be conducted regularly for retail investors to minimize herd behaviour of investing during market rise and heavy redemptions at times of fall. Third, the economic policies should be stable and forward-looking to ensure foreign investors remain attracted to the Indian stock markets at all times.

Volatility spillover impact of FII and MF net equity flows on the Indian sectoral stock indices: recent evidence using BEKK-GARCH

Volatility spillover impact of FII and MF net equity flows on the Indian sectoral stock indices: recent evidence using BEKK-GARCH

Portfolio flows – exchange rate volatility: is there a puzzling relationship?

PurposeThis study investigates possible shock transmission and volatility spillover effects among the exchange rate changes and international portfolio flows for United States vis-à-vis two fast-growing emerging country groups: the BRICS (Brazil, Russia, India, China and South Africa) and MINT (Mexico, Indonesia, Nigeria and Turkey).Design/methodology/approachApplying VAR-BEKK-GARCH model, the evidence indicates that exchange rate fluctuations have a negative impact on net equity flows in Brazil, Russia, India and Turkey; thus, supporting the view that exchange rate uncertainty is an important driver of equity home bias.FindingsAs for the comparison of the pre- and post-crisis period, the findings support the evidence that the post-crisis period witnessed a greater number of cases of significant shock and volatility spillovers among exchange rate uncertainty and portfolio flows.Originality/valueOverall, the empirical results provide fresh insights and policy implications for domestic and international investors through investment activities, and for policymakers through maintaining economic and financial stability.

Revisiting portfolio flows – exchange rate nexus in emerging markets: a Markov Regime Switching MGARCH approach

ABSTRACT This paper focuses on the role of exchange rate uncertainty on the net portfolio flows using a bilateral monthly data for the US vis-à-vis six emerging countries (E-6) (India, Brazil, Mexico, Russia, Indonesia and Turkey) over the period 1993:01–2017:12. Employing Markov Regime Switching CCC GARCH model, the results suggest that exchange rate volatility affects both net bond and net equity flows for whole sample. The correlation evidence between net portfolio flows and exchange rate uncertainty is stronger in the cases of Brazil and Mexico, in terms of supporting these countries’ bond and equity home bias in high volatility regime.

Volatility spillover impact of FII and MF net equity flows on the Indian sectoral stock indices: Recent evidence using BEKK-GARCH

This study investigates the shock transmission and volatility spillover between nine Indian stock market sectoral indices with both foreign institutional investors (FII) and mutual funds (MF) net equity flows using the BEKK-GARCH model. We use daily data covering the period from 1 January 2010 to 31 May 2019. Significant volatility spillover was observed from FII net equity inflows to five sectoral equity indices, while there was no volatility spillover from MF flows to any sectoral indices except telecom. Further, there was the presence of shock transmission from FII flows to five sectoral indices, but for MF flows, shock transmission was observed only in healthcare. Findings suggest that FII flows influence the stock market volatility, but MF flows are not having a significant impact.

English

This study aims to examine the relationship between international capital flows, and domestic credit expansion in Tanzania during the period between 2004 and 2012. The data used in this study is extracted from World Bank database except credit regulation quality index (CRINDEX), which is taken from the Fraser Institute Index of Economic Freedom. The study disintegrated the variable capital flow into debt and equity flows, and examined the relationship between the two sub-variables and the domestic credit. The findings of this study reveal that the general current account balance is not influential enough to determine the empirical relationship between international capital flows and domestic credit expansion; rather the component of international capital flow, net debt flow, is reported to have more significant relationship with domestic credit. The perceptible empirical relationship reported in this study between net debts flows and domestic credit development brings forward the need for analytical models which can explain this relationship. Particularly, it is imperative to gain a better understanding of both the positive and negative relationships between international debt flows and domestic credit growth. In essence due to the current East African Community Common Market Agreement, the financial integration and free mobility of capital among country members will have a serious effect on productive allocation of bank credit via the rise of inflows into the non-banking sector which crowd out domestic loans to non-financial business sector. This twist in credit allocation may result into real estate booms, financial vulnerability, and poor economic growth. Therefore, creating more investment opportunities could significantly alleviate the adverse effects of capital inflows. Key words: Foreign capital flow, domestic credit, current account balance, net debt flows, net equity flows.

Net Equity and Debt Flows to Emerging Market and Developing Economies in the Post-Crisis Era

ABSTRACTWe investigate the determinants of net equity and debt flows into 60 emerging and developing countries during 1986–2012, with a special focus on the period following the onset of the global financial crisis (GFC). Our results controlling for endogeneity show that net equity flows to emerging markets were mostly influenced by global risk factors, while net debt flows were affected by country-specific factors. We further distinguish the factors that were more pronounced in determining net portfolio flows to emerging markets since the GFC. The US real interest rate had significant spillover effects on net equity flows after the GFC. An increase in country’s domestic credit attracted net debt inflows before the GFC, while it was associated with net equity outflows after the GFC. We also find that capital controls moderated net debt flows since the GFC.

Exchange rate uncertainty and international portfolio flows: A multivariate GARCH-in-mean approach

This paper examines the impact of exchange rate uncertainty on different components of net portfolio flows, namely net equity and net bond flows, as well as their dynamic linkages. Specifically, a bivariate VAR GARCH-BEKK-in-mean model is estimated using bilateral monthly data for the US vis-à-vis Australia, Canada, the euro area, Japan, Sweden, and the UK over the period 1988:01-2011:12. The results indicate that the effect of exchange rate uncertainty on net equity flows is negative in the euro area, the UK and Sweden, and positive in Australia. The impact on net bond flows is also negative in all countries except Canada, where it is positive. Under the assumption of risk aversion, the findings suggest that exchange rate uncertainty induces a home bias and causes investors to reduce their financial activities to maximise returns and minimise exposure to uncertainty, this effect being stronger in the UK, the euro area and Sweden compared to Canada, Australia and Japan. Overall, the results indicate that exchange rate or credit controls on these flows can be used as a policy tool in countries with strong uncertainty effects to pursue economic and financial stability.

Volatility and foreign equity flows: evidence from the Philippines

PurposeThe purpose of this paper is to dissect the dynamic linkages between foreign equity flows, exchange rates and equity returns in the Philippines.Design/methodology/approachUsing a parsimonious SVARX‐GARCH model and unique daily equity flow data, this research models the relationship between net equity flows, conditional variance of stock returns and conditional variance of exchange rates.FindingsThe authors find several noteworthy results, which are unique to this study and several results that confirm existing literature. Much of existing literature on foreign equity flows into emerging economies find that foreign equity investors are trend chasers and equity flows are auto correlated. The authors confirm these finding in the Philippines and document two new and important findings. First, it was found that unexpected increases in foreign equity flows to the Philippines increases the conditional volatility of the Filipino stock market significantly over the next two weeks of trading. The second major finding is that unexpected shocks to foreign equity flows sharply increases the conditional variance of the USD/PHP exchange rate over the next two to three weeks of trading.Practical implicationsTaken together, the results indicate that foreign equity investment, while providing many benefits for small open economies such as the Philippines, does in the short run increase the conditional variance of both the equity market and exchange rates. Policy makers must weigh the benefits of increased risk sharing and the potential for lower costs of capital with the short‐run potential for increase swings in asset prices.Originality/valueThis paper is one of the only studies of its kind to test the impact of foreign equity flows on the conditional volatility of returns and exchange rates.

Volatility and Foreign Equity Flows: Evidence from the Philippines

Purpose: To dissect the dynamic linkages between foreign equity flows, exchange rates and equity returns in the Philippines.Design/Methodology/Approach: Using a parsimonious SVARX-GARCH model and unique daily equity flow data this research models the relationship between net equity flows, conditional variance of stock returns, and conditional variance of exchange rates.Findings: The authors find several noteworthy results, which are unique to this study and several results that confirm existing literature. Much of existing literature on foreign equity flows into emerging economies find that foreign equity investors are trend chasers and equity flows are auto correlated. We confirm these finding in the Philippines. We also document two new and important findings. First, we find that unexpected increases in foreign equity flows to the Philippines increases the conditional volatility of the Filipino stock market significantly over the next two weeks of trading. Our second major finding is that unexpected shocks to foreign equity flows sharply increases the conditional variance of the USD/PHP exchange rate over the next two to three weeks of trading. Implications: Taken together our results indicate that foreign equity investment, while providing many benefits for small open economies such as the Philippines, does in the short run increase the conditional variance of both the equity market and exchange rates. Policy makers must weigh the benefits of increased risk sharing and the potential for lower costs of capital with the short-run potential for increase swings in asset prices.Originality: This paper is one of the only studies of its kind to test the impact of foreign equity flows on the conditional volatility of returns and exchange rates.

On the Determinants of External Imbalances and Net International Portfolio Flows: A Global Perspective

In a panel covering a large number of countries from 1970 to 2003, we show that net portfolio flows play an important role in correcting external imbalances, since they are driven by common determinants represented by countries’ demographic profiles, the quality of institutions, monetary aggregates and initial net financial asset positions. Population ageing causes current account deficits, net equity inflows and net outflows in debt instruments. A higher money to GDP ratio – associated with lower interest rates – favours international investments in domestic stocks to the detriment of the less attractive domestic bonds. Additionally, current account balances are driven negatively by real GDP growth, losses in competitiveness and increases in the quality of the institutions; net equity flows are driven positively by the quality of the institutions and negatively by per capita income; while net flows in debt instruments are driven by long-term interest rate differentials and deviations from the UIP. JEL Classification: F21, F32, F41, O16

Exchange Rates, Equity Prices, and Capital Flows

We develop an equilibrium model in which exchange rates, stock prices and capital flows are jointly determined under incomplete forex risk trading. Incomplete hedging of forex risk, documented for US global mutual funds, has three important implications: 1) exchange rates are almost as volatile as equity prices when the forex liquidity supply is not infinitely price elastic; 2) higher returns in the home equity market relative to the foreign equity market are associated with a home currency depreciation; 3) net equity flows into the foreign market are positively correlated with a foreign currency appreciation. The model predictions are strongly supported at daily, monthly and quarterly frequencies for 17 OECD countries vis-a-vis the US. Moreover, correlations are strongest after 1990 and for countries with higher market capitalization relative to GDP, suggesting that the observed exchange rate dynamics are indeed related to equity market development.

Explaining Exchange Rate Dynamics: The Uncovered Equity Return Parity Condition

By employing Lucas' (1982) model, this study proposes an arbitrage relationship - the Uncovered Equity Return Parity (URP) condition - to explain the dynamics of exchange rates. When expected equity returns in a country/region are lower than expected equity returns in another country/region, the currency associated with the market offering lower returns is expected to appreciate. First, we test the URP assuming that investors are risk neutral and next we relax this hypothesis. The resulting risk premia are proxied by economic variables, which are related to the business cycle. We employ differentials in corporate earnings' growth rates, short-term interest rate changes, annual inflation rates, and net equity flows. The URP explains a large fraction of the variability of some European currencies vis-a-vis the US dollar. When confronted with the naive random walk model, the URP for the EUR/USD performs better in terms of forecasts for a set of alternative statistics.

Daily Cross-border Equity Flows: Pushed or Pulled?

In a model that is consistent with the existence of a home bias and with foreign investors that are less informed than domestic investors, we show that unexpectedly high worldwide returns lead to net equity inflows into small countries. In addition, a small country experiences net equity inflows when its stocks earn unexpectedly high returns. We investigate these predictions using daily data on net equity flows for nine emerging market countries and find that equity flows are positively related to host country stock returns as well as market performance abroad. Both our theoretical model and our empirical analysis show that global stock return performance is an important factor in understanding equity flows.