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The Dynamics of Emerging Market Equity Flows


Geert Bekaert


Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)

Campbell R. Harvey


Duke University - Fuqua School of Business; National Bureau of Economic Research (NBER)

Robin L. Lumsdaine


American University - Department of Finance and Real Estate; National Bureau of Economic Research (NBER)

July 1999


Abstract:     
We study the interrelationship between capital flows, returns, dividend yields and world interest rates in 20 emerging markets. We use a structural VAR framework to examine the impact of shocks in interest rates and net capital flows on asset returns and the cost of capital. In contrast to previous research, we explicitly take into account a fundamental nonstationarity in the data - structural breaks induced by liberalizations. We estimate our VARs in both the full sample, pre-break and the post-break sample, with the breaks endogenously determined. We find significant differences, in particular, between the pre-break analysis and the post-break analysis. We revisit a number of important hypotheses within the VAR framework. First, the "push effect" from world interest rates to capital flows appears consistently when we cumulate impulse responses whereas contemporaneously interest rates and capital flows show no consistent correlation pattern. Second, unexpected shocks to equity flows have a strongly positive contemporaneous effect on returns, in line with the findings of Clark and Berko (1997), and Froot et al. (1998). The effect immediately dies out but there is only incomplete reversal suggesting some of the effect is permanent. This is consistent with our finding that positive shocks in net equity capital flows lead to lower dividend yields -- our proxy for expected returns. Following Bekaert and Harvey's (1999) argument that dividend yield changes reveal information about the cost of equity capital, the equity capital flow shocks lead to lower cost of capital in many countries. We find that this relation is dramatically strengthened if we estimate our VARs on the post break sample. Although part of the initial effect may be due to "price pressure", our results suggest part of the response is near permanent and beneficial. Third, we revisit the Bohn and Tesar (1996) argument that capital flows are more likely driven by "return chasing" than portfolio rebalancing. We find evidence that positive returns shocks are followed by increased short-term equity capital flows. Finally, we provide interesting new results on the transition from pre-break to post-break systems. In almost all the countries we examine, our transition analysis of equity flows suggests that when capital leaves it leaves faster than it came. These intriguing results may shed light on the recent crises in Latin America and Asia and the role of capital flight.

Number of Pages in PDF File: 61

JEL Classification: F3, G0, G1

working papers series


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Date posted: September 24, 1999  

Suggested Citation

Bekaert, Geert and Harvey, Campbell R. and Lumsdaine, Robin L., The Dynamics of Emerging Market Equity Flows (July 1999). Available at SSRN: http://ssrn.com/abstract=171084 or http://dx.doi.org/10.2139/ssrn.171084

Contact Information

Geert Bekaert
Columbia Business School - Finance and Economics ( email )
3022 Broadway
New York, NY 10027
United States

National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Campbell R. Harvey (Contact Author)
Duke University - Fuqua School of Business ( email )
Box 90120
Durham, NC 27708-0120
United States
919-660-7768 (Phone)
919-660-8030 (Fax)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Robin L. Lumsdaine
American University - Department of Finance and Real Estate ( email )
Kogod School of Business
4400 Massachusetts Ave., N.W.
Washington, DC 20016-8044
United States
National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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