Portfolio Capital Flows: A Simple Coincident Indicator for Emerging Markets
44 Pages Posted: 19 Jul 2014
Date Written: July 18, 2014
The scarcity of up-to-date data is a meaningful constraint in the analysis of capital flows, especially for Emerging Markets (EMs). Indeed, the most commonly used source of cross-country data on capital flows is the Balance of Payments (BoP) statistics collected by the International Monetary Fund. Nevertheless, these data are available at low frequency and are usually published three to nine months later, notably for EMs. This delay is problematic for policy makers who need to calibrate appropriate policies in order to control the pernicious effects of volatile foreign capital flows, i.e. economic and financial imbalances resulting from surges and/or sudden stops. To address this issue, we propose a simple coincident proxy to capture the gross portfolio capital flows towards EMs. This indicator is a metric of the current state of these portfolio flows and uses data from Emerging Portfolio Fund Research (EPFR) Global which covers net bond and equity flows. In an error correction framework, we propose to better capture foreign investors’ sentiment. We find that the trend in EPFR data is a coincident indicator of BoP flows mainly in regional aggregates and large EMs. Finally, we build some Investor Sentiment indices that provide relevant information on EM asset returns.
Keywords: Emerging Markets, Balance of Payments, Portfolio Capital Flows, EPFR, Coincident Indicator, Investor Sentiment, Sudden Stop
JEL Classification: F21, F32, F37
Suggested Citation: Suggested Citation