International Capital Flows and Liquidity

53 Pages Posted: 21 Jan 2011 Last revised: 11 Mar 2011

See all articles by Dimitrios Vagias

Dimitrios Vagias

Erasmus University Rotterdam (EUR) - Rotterdam School of Management (RSM)

Mathijs A. Van Dijk

Erasmus University - Rotterdam School of Management; Erasmus Research Institute of Management (ERIM)

Multiple version iconThere are 2 versions of this paper

Date Written: March 2011

Abstract

We study whether international capital flows affect local market liquidity, and vice versa. We estimate vector autoregressions with monthly U.S. equity portfolio flows and local stock market liquidity and returns for 46 countries in six regions over 1995-2008. We find that flows to developed Europe and Asia/Pacific positively respond to local market liquidity, while U.S. market liquidity positively predicts flows to developed and emerging Europe and emerging Asia. Capital flows to various regions are thus responsive to home and host market liquidity. For developed America, Europe, Asia/Pacific, and emerging Asia, capital inflows are associated with an improvement in local market liquidity, which suggests that foreign investors tend to provide rather than consume liquidity on local markets. This effect is stronger for countries with greater transparency and less developed financial markets. Our analysis lends little support to the view that foreign investors destabilize local markets through an adverse impact on liquidity.

Suggested Citation

Vagias, Dimitrios and Van Dijk, Mathijs A., International Capital Flows and Liquidity (March 2011). Available at SSRN: https://ssrn.com/abstract=1744161 or http://dx.doi.org/10.2139/ssrn.1744161

Dimitrios Vagias

Erasmus University Rotterdam (EUR) - Rotterdam School of Management (RSM) ( email )

P.O. Box 1738
Room T08-21
3000 DR Rotterdam, 3000 DR
Netherlands

Mathijs A. Van Dijk (Contact Author)

Erasmus University - Rotterdam School of Management ( email )

P.O. Box 1738
Rotterdam, 3000 DR
Netherlands
+31 10 408 1124 (Phone)
+31 10 408 9017 (Fax)

HOME PAGE: http://mathijsavandijk.com/

Erasmus Research Institute of Management (ERIM)

P.O. Box 1738
3000 DR Rotterdam
Netherlands

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