Foreign Portfolio Flows and the Trading Environment

58 Pages Posted: 22 Mar 2012

See all articles by Kjell Jorgensen

Kjell Jorgensen

BI Norwegian Business School - Department of Financial Economics

Richard Priestley

Norwegian Business School

Date Written: January 15, 2012

Abstract

We show that the impact of foreign investors' portfolio flows on the domestic equity market depends crucially on the costs and ease of access to trading domestic securities. We examine all foreign portfolio flows in two long sub-samples where trading costs and market access are substantially different. When the domestic equity market becomes easier and less costly to trade in, an increase in foreign portfolio flows reduces the cost of equity capital consistent with risk sharing arguments, and increases liquidity. Conversely in the regime of high entry costs, foreign portfolio flows appear to be speculative, increasing the cost of equity capital and reducing liquidity. The results have important implications for the debate regarding efforts to reduce foreign speculation through increasing transaction costs.

Keywords: Foreign Investment, Portfolio Flows, Cost of Equity Capital, Market Liquidity

JEL Classification: G11, G12, G14, G15

Suggested Citation

Jorgensen, Kjell and Priestley, Richard, Foreign Portfolio Flows and the Trading Environment (January 15, 2012). Available at SSRN: https://ssrn.com/abstract=2027400 or http://dx.doi.org/10.2139/ssrn.2027400

Kjell Jorgensen (Contact Author)

BI Norwegian Business School - Department of Financial Economics ( email )

Nydalsveien 37
Oslo, 0442
Norway

HOME PAGE: http://www.bi.no

Richard Priestley

Norwegian Business School ( email )

Nydalsveien
37
N-0442 Oslo, 0283
Norway
47 46410515 (Phone)

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