Portfolio Inflows Research Articles

What leads some countries to experience larger decreases in foreign flows during low-flow episodes? Evidence from international portfolio flows

This paper investigates the drivers explaining the heterogeneous responses of foreign portfolio investors across 43 emerging markets and developing economies (EMDEs) during low-flow episodes. Our investigations reveal several findings: (a) During low-flow episodes, EMDEs with stronger macroeconomic/institutional fundamentals—e.g., larger foreign reserves, less public indebtedness, and better institutional quality—suffer fewer reductions in foreign inflows. (b) EMDEs with more open/developed financial markets attract more portfolio inflows during surges but suffer larger declines during stops. Hence, we provide evidence supporting the foreign investor differentiation (according to fundamentals) and the mixed blessing of financial sectors hypothesis.

Does a country’s sovereign credit rating drive capital inflows into emerging European markets? Evidence from Balkan region

This study investigates the impact of sovereign credit ratings on capital inflows and their composition for emerging European economies in the Balkan region. This study sheds light on this nexus by selecting Bulgaria, Croatia, Greece, Romania, and Slovenia between 2006-2018 using panel data analysis. The estimation results underscore that a sovereign credit rating is a significant driver of capital inflows, and a decline in sovereign credit risk leads to increased foreign direct investment and portfolio inflows. Furthermore, the estimation results demonstrate the importance of the country’s specific pull factors and reveal that a country characterized by a larger market size, better institutional quality, a stable macroeconomic environment, and a more developed financial market could attract more capital inflows. Moreover, the results highlight that global risk and liquidity push factors have a significant effect on driving cross-border capital inflows into the Balkan economies. The findings suggest that policymakers should reduce sovereign credit risks and increase the country’s absorptive capacity and competitiveness in order to attract more capital inflows to the investigated Balkan countries.

On the Macroeconomic Determinants of Foreign Investor Participation in the Nairobi Securities Exchange in Kenya

The participation of foreign investors in a country's securities market plays a crucial role in the growth of any country. Kenya has continued to experience volatility of foreign investor flows leading to instability in the financial market. The study aimed to identify the macroeconomic determinants, which have a significant effect on foreign investor participation in Kenya. Secondary monthly data for the period January 2020 to December 2023 was extracted from the Central Bank of Kenya, Capital Markets Authority, and Kenya National Bureau of Statistics. The multiple regression model with the assistance of SPSS software was employed to analyze data. Findings revealed that the inflation rate, exchange rate, and GDP growth rate had a negative and statistically significant effect on the participation of foreign investors as illustrated by P-values of 0.001, 0.032, and 0.05 respectively, which are less than 0.05. The results inferred that the inflation rate, exchange rate, and GDP growth rate affect the participation of foreign investors at the Nairobi Securities Exchange. Interest rate as measured by the 365-day Treasury bill rate had a positive and statistically insignificant effect on the participation of foreign investors as presented by a P-value of 0.107. The results implied that changes in Treasury bill rates do not affect the participation of foreign investors at the Nairobi Securities Exchange. The notable fluctuations in currency rates and their volatility, along with the impact of inflation on foreign portfolio inflows, underscore the crucial role played by monetary policy. This should be accomplished by stabilizing the value of the Kenyan shilling. Maintaining the stability of the value of the shilling is crucial to boosting the participation of foreign investors.

Economic sentiment and foreign portfolio flows: Evidence from Türkiye

The notable surge in capital flows in recent years has emerged as a key factor shaping the dynamics of international financial markets and influencing economic performance of emerging economies. Even though macroeconomic fundamentals of an economy can explain some of the patterns in international capital flows, behavioral factors also seem to be essential for positioning capital flows across countries. In this study, we aim to examine whether overall economic sentiment towards Turkish economy plays a significant role on net portfolio flows to Türkiye. To this end, we first construct a novel text-based sentiment index called "Turkish Economic Sentiment Index (TESI)", to capture the behavioral tendencies of international investors and media towards Türkiye. Our subsequent step integrates TESI into autoregressive distributed lag models (ARDL) alongside major pull-push determinants to assess whether market sentiment holds discernible influence on capital influx into Turkey. The results reveal that the TESI and VIX stand out as pivotal determinants influencing international portfolio flows. The TESI has a positive impact on portfolio flow dynamics, whereas the degree of global risk aversion inversely affects these flows. These findings align with the contention that a favorable sentiment can boost portfolio inflows to emerging markets. Conversely, heightened volatility expectations in global markets can prompt outflows from these economies.

Impact of Macroeconomic Determinants on Foreign Portfolio Investment in Nigeria

Foreign capital inflows, including foreign portfolio investments (FPI), significantly contribute to filling Nigeria's domestic saving gap and are important sources of capital formation, technological development, innovative capacity, skills building, and organizational improvements. However, exchange rate fluctuations have controversially impacted FPI flows. Some studies found exchange rate changes increased Nigerian FPI, while others determined a negative relationship. This study examined macroeconomic determinants of FPI in Nigeria from 2011-2022 using quarterly data. Applying OLS modeling after confirming variables were integrated at levels and first differences, results showed exchange rates, inflation, and GDP significantly influenced FPI flows. Specification tests validated model stability. Analysis revealed exchange rate fluctuations substantially drove capital inflow and divestment decisions. Suggesting exchange rate uncertainty discourages long-term FPI, findings imply the need for fiscal policies supporting security and business environment certainty to attract foreign investors. Additionally, raising benchmark interest rates above inflation could ensure positive real returns and promote investments. Overall, creating macroeconomic stability through coordinated fiscal, monetary, and exchange rate policies appears critical for Nigeria to reap the development benefits of sustained foreign portfolio inflows. It therefore, suggested that, Fiscal Authority should create an enabling environment, especially by providing adequate security in the country in order to attract and retain foreign investors in Nigeria. Also, the monetary authority should increase the interest rate (MPR) which is the anchor rate in order to have positive rate of return after considering the rate of inflation in the country. In conclusion, the study recommended for further study especially on foreign direct investment in Nigeria.

The temporal dimensions of policy responses to capital surges

The temporal dimensions of policy responses to capital surges

A Test of Positive Feedback Trading among Foreign Portfolio Investors in Nigeria

It has been established in the literature that the trading behavior of international investors may increase market vulnerability, especially for emerging markets. Consequently, this study examines whether positive feedback trading exists in the Nigerian stock market. Both descriptive and inferential analyses are carried out on monthly data covering the period 2013 to 2020. Specifically, the ARDL bounds testing approach is employed. Findings indicate that positive feedback trading exists in the market, as stock returns have positive and significant influence on foreign portfolio inflows. The results further show that this trading pattern becomes more prominent with rising economic growth. The findings again reveal that the exchange rate and the interest rate explain the foreign portfolio inflows in the Nigerian market. The study’s outcomes lend support for the pull theory in explaining the foreign portfolio inflow. However, no evidence is found in support of the push theory, as an explanation for the foreign portfolio inflow as the “OPEC basket crude oil price” is insignificant. It is thereby recommended that regulators should adopt measures that will help foreign investors to be better informed about the Nigerian market, in order to reduce their positive feedback trading behavior. Moreso, there is a need for the government to put in place policies targeted toward enhancing the growth of the stock market and the economy. In this way, the negative impact of such trading behavior will be minimal, as short-term trading by foreign investors will be reduced and the foreign portfolio inflows will be sustainable.

Exchange rate regimes as thresholds: The main determinants of capital inflows in emerging market economies

We investigate whether the impacts of the main push (global financial conditions, GFC) and pull (growth) factors on capital inflows are invariant to endogenously estimated thresholds for exchange rate regimes (ERRs) in emerging market economies. The impact of GFC is higher under more flexible ERRs for aggregate capital and portfolio inflows. FDI inflows are determined by growth. The sensitivity of aggregate and other investment inflows to growth is higher under more rigid ERRs. Our results also suggest that managed ERRs encourage capital inflows by allowing countries to import the monetary policy credibility of the anchored country and to provide an exchange rate guarantee.

Is domestic uncertainty a local pull factor driving foreign capital inflows? New cross-country evidence

Foreign investors pay attention to economic and political developments in the recipient country and might decide to postpone or divert their investments when uncertainty increases. However, due to the limited availability of cross-country uncertainty data, empirical evidence on this channel is scarce. This paper provides a systematic analysis of how bank credit, portfolio debt, and portfolio equity capital inflows from 51 source countries into 143 recipient countries react to an increase in political and economic uncertainty in the recipient country, proxied using the World Uncertainty Index. Our results suggest that an increase in uncertainty induces a substantial and persistent decrease in bank credit and portfolio debt inflows, and (to a lesser extent) in equity inflows. We also uncover important heterogeneities in the response of portfolio inflows. First, the effects are larger for developing economies and those with more open capital markets. Second, inflows through actively managed mutual funds are similarly sensitive to changes in uncertainty that are country-specific (purely local uncertainty) and common across countries (global uncertainty), while inflows through passive ETFs are only sensitive to changes in global uncertainty.

Autoregressive Distributed Lag (ARDL) Analysis of Foreign Portfolio Investments Determination in Nigeria

This study investigates the key macroeconomic variables determining foreign portfolio inflows (FPI) to Nigeria using the autoregressive distributed lag procedure that includes the bounds test of cointegration and error correction mechanism applied against time-series Nigerian data from 1986 through 2019. The results reveal the existence of long-run equilibrium relationship between FPI and exchange rate (EXR), inflation (INF), interest rate (INT), real GDP, and Tax (TXR). Short-run errors are adjusted at a speed of 77.87% per annum, in the long-run. Causality is found to jointly-flow from the explanatory variables to FPI inflows. In all the model estimations - autoregressive, short- and long-runs, exchange rate exerted negative and significant effect on FPIR. Inflation and tax significantly affected FPI inflows to Nigeria. Growth in real GDP and interest rate positively influenced FPIR, but not significantly. The results indicate that the major determinants of FPI inflows are exchange rates, inflation, and tax.

The Time-Varying Effects of Policies: Evidence from Capital Flows to Emerging Markets

We use a novel approach—instrumental variable quantile regression estimates—to analyze expected portfolio inflows to emerging economies. We consider country-specific conditions and the effectiveness of policy interventions when economies are faced with an adverse international financial shock. This approach allows differentiation between the short- and medium-term impacts. Our results suggest that macroprudential policies and foreign exchange actions may reduce the risks of large capital flow movements following an adverse international shock; however, capital flow management policies such as capital control stringency seem to be ineffective. Besides, there is little evidence that monetary policy and high quality of institutions can immediately protect emerging markets from the risks of international financial shocks. However, institutional quality may effectively dampen the impact of excessive flows in the medium term. These findings emphasize the limitations of previous studies, which focused merely on the short-term horizon.

Capital flows, economic growth and the real effective exchange rate: Evidence from China

This paper examines the Granger causal relationship between capital flows and economic growth in China over the period 1998Q1–2019Q2, allowing for real effective exchange rate (REER) effects. As parameter instability tests indicate structural changes, we use bootstrap rolling window causality tests, which suggest that the causal nexus between capital flows and GDP growth is time-varying. We find that the causal links between foreign direct investments (FDIs) and GDP growth are hardly affected by the REER, whereas the REER plays a more important role in affecting the causal connections between portfolio investments and other investments and GDP growth. Our results suggest that cumulative portfolio inflows and cumulative other investment inflows harm GDP growth, whereas cumulative portfolio outflows and cumulative other investment outflows positively affect GDP growth.

Kfstar and Portfolio Inflows: A Focus on Latin America

Kfstar and Portfolio Inflows: A Focus on Latin America

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.

Arab Republic of Egypt

The growth impact of the COVID-19 crisis has so far been less severe than expected, as strong consumption helped offset weak tourism and investment. Measures taken to address the health and social needs and support the sectors most directly affected by the crisis appear to have helped mitigate the impact of the shock. External market conditions have improved with a strong return of portfolio inflows since the approval of the Stand-By Arrangement (SBA).

Capital Flows-at-Risk: Push, Pull and the Role of Policy

We characterise the probability distributions of various categories of gross capital flows conditional on information contained in financial asset prices in a panel of emerging market economies, with a focus on ‘tail’ events. Our framework, based on the quantile regression methodology, allows for a separate role of push- and pull-type factors, and because it is based on high-frequency data, can quantify the likelihood of different outturns before official capital flows data are released. We find that both push and pull factors have heterogeneous effects across the distributions of gross capital flows, which are most marked in the left tails. We also explore the role of various policies, and find that macroprudential and capital flows management measures are stabilising, leading to lower chances of either large portfolio inflows or out flows. JEL Classification: F32, F34, G15

Tax policies and developments affecting foreign portfolio investment in sub-Saharan Africa

Despite the increase in nonofficial cross-border capital flows to sub-Saharan Africa following the 2007/2008 global financial crisis, the region is still receiving a limited amount of foreign portfolio investment (FPI) compared to other developing markets. This paper seeks to explore the factors explaining sub-Saharan Africa’s lack of FPI and what measures could be implemented to encourage FPI in the region. The key takeaways of this paper are: • Tax structures have been identified as one of the key impediments to FPI in Southern Africa. Although various sub-Saharan jurisdictions exempt capital gains on the disposal of listed shares from tax, significant withholding taxes are generally levied on dividend and interest payments to foreign investors. • Mauritius, a popular hub for African investment, has recently been under the spotlight with a number of sub-Saharan African jurisdictions terminating or amending their tax treaties with the country or introducing domestic antiavoidance measures to combat perceived treaty shopping. This is expected to have a negative impact on investment flows through Mauritius. In addition, coronavirus disease-19 relief measures introduced by sub-Saharan authorities focus on safeguarding local businesses and foreign direct investment rather than FPI. • The quality of governance is also a significant factor in attracting net portfolio inflows, and there is a clear need in sub-Saharan Africa for simple, efficient tax systems and appropriate tax incentives to support investor-friendly policies and encourage and stimulate FPI.

Substitution patterns in capital inflows: Evidence from disaggregated capital flow data

Superficial examination of aggregate gross cross-border capital inflow data suggests that there was no substitution between portfolio inflows and bank loans in recent years. However, our novel analysis of disaggregate inflows shows interesting heterogeneity in advanced economies (AE) and emerging markets (EM), highlighting the importance of differentiating by types of instrument and borrowing sector. There has been substitution of bank loans for portfolio debt securities not only in the case of AE sovereign borrowers and AE corporate borrowers (from 2008), but also in the case of EM sovereign borrowers. However, in the case of AE corporate borrowers (before 2008) and EM corporate borrowers (from 2008), the relationship corresponds to complementarity across types of gross capital inflows, especially during periods of positive capital gross inflows after the global financial crisis. A large part of these patterns does not seem to be driven by a common phenomenon across countries, but rather by country-specific factors.

The Main Determinants of Capital Inflows in Emerging Market Economies: Does the Exchange Rate Regime Matter?

There is a bulk of literature in analyzing the impacts of exchange rate regimes (ERRs) on capital flows into emerging market economies. However, these studies mainly do not take into account integration and cointegration properties of variables. This paper aims to tackle this important issue by investigating whether ERRs matter for the impacts of the main push (global financial conditions, GFC) and pull (real GDP) factors on capital inflows into emerging market economies. We find that worsening GFC decreases all types of capital inflow except foreign direct investments in case of floating ERR. This impact is statistically significant only for portfolio inflows in case of managed ERR. The pull factor is often positive and statistically significant in determining capital inflows in the long-run only under floating ERRs. These results suggest that the long-run impacts of the main pull and push factors on capital inflows are often magnified under more flexible ERRs.

The size and destination of China’s portfolio outflows

ABSTRACT China’s large financial system is relatively closed, raising concerns that liberalization of China’s capital account could have disruptive effects on the global financial system. We estimate a portfolio allocation model to estimate an economy’s foreign portfolio investment, using panel data for 39 economies. We estimate the model separately for equity and debt securities holdings. We find that portfolio allocation to a foreign economy depends on the destination economy’s market size, gravity variables, governance indicators and capital controls in source and destination economies. We then construct a counterfactual scenario of China’s overseas portfolio investment allocations in 2015 if China had liberalized capital outflows. The analysis indicates that China’s holdings of overseas portfolio assets would have been large at 13% to 29% of Chinese GDP, or 5 to 12 times its actual levels. These asset holdings would have been predominantly from the world’s deepest financial markets: the United States, euro area and Japan. Emerging-market economies would have received relatively little additional portfolio inflows from China, suggesting that liberalization of China’s portfolio outflows may not prove disruptive to the global financial system.