Behavior and Effects of Equity Foreign Investors on Emerging Markets

28 Pages Posted: 16 Mar 2008

See all articles by Barbara Alemanni

Barbara Alemanni

affiliation not provided to SSRN

Jose Renato Haas Ornelas

Banco Central do Brasil

Date Written: 2007

Abstract

This paper analyzes empirically the behavior of foreign investors on emerging equity markets in a cross-country setting, including 14 emerging markets from the year 2000 to 2005. We could find little evidence that these investors have brought problems to local emerging markets. Foreign investors seem to build and unwind their positions on emerging stock markets slowly enough to avoid problems as price pressure or volatility and kurtosis upswings on the stock market. Also, no negative effects on the foreign exchange market could be found. Regarding feedback trading, we support two hypotheses: positive feedback trading by hedged investors and negative feedback trading by unhedged investors. The latter has stronger statistical evidence and is more likely to occur in the real world. We conclude that there is no reason to impose long-term restrictions to foreign flows.

Keywords: Feedback Trading, Portfolio Flows, Emerging Markets, Foreign Investors

JEL Classification: G14, G15, G18

Suggested Citation

Alemanni, Barbara and Ornelas, Jose Renato Haas, Behavior and Effects of Equity Foreign Investors on Emerging Markets (2007). Available at SSRN: https://ssrn.com/abstract=1105719 or http://dx.doi.org/10.2139/ssrn.1105719

Barbara Alemanni

affiliation not provided to SSRN ( email )

Jose Renato Haas Ornelas (Contact Author)

Banco Central do Brasil ( email )

P.O. Box 08670
SBS Quadra 3 Bloco B - Edificio-Sede
Brasilia, Distrito Federal 70074-900
Brazil

HOME PAGE: http://www.bcb.gov.br

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