Foreign Investors in Emerging Equity Markets: Currency Effect Perspective
32 Pages Posted: 3 Oct 2015
Date Written: August 15, 2015
This paper takes a perspective from foreign exchange (FX) to investigate the daily trading behavior and price impact of foreign investors in six Asian emerging equity markets over the past two decades. It exploits the unsolved interrelationship between capital flows and equity returns, and it also explores a possible role of FX and provides several new findings. First, flows chase domestic equity returns but not currency returns. Second, flows have an impact on FX returns as well as equity returns, and both impacts are more than temporary. When currency effects are washed out, the equity effects either become insignificant or are substantially reduced in magnitude. Finally, both past returns and volatility in the global equity/FX market affect flows. Our findings challenge the literature, which neglects FX on this topic, and provide new insights on the dynamics of flows, FX, and equity markets.
Keywords: Foreign Investor, Capital Flows, Local Equity Market, Exchange Rate
JEL Classification: E44, F20, F34, G1
Suggested Citation: Suggested Citation