Cross-Border Capital Flows and Information Spillovers across the Equity and Currency Markets in Emerging Economies

37 Pages Posted: 10 May 2021

See all articles by Deven Bathia

Deven Bathia

Queen Mary University of London

Riza Demirer

Southern Illinois University Edwardsville - Department of Economics & Finance; Economic Research Forum (ERF)

Roman Ferrer Lapeña

Faculty of Economics. University of Valencia

Ibrahim Raheem

University of Ibadan - Department of Economics

Date Written: May 6, 2021

Abstract

This paper presents a novel perspective on the interaction between equity and currency markets in emerging market economies (EMEs) by (i) examining the nonlinear effects of capital flows on return spillovers between the stock and currency markets in a sample of twelve EMEs via the causality-in-quantiles approach of Balcilar et al., (2016), and (ii) providing a comparative analysis of the influence of debt versus equity flows over the spillover patterns. We show that the causal effects of international debt and equity flows on return spillovers across the equity and FX markets are largely concentrated at lower quantiles, suggesting that the arrival of information via capital flows tends to ease shock transmissions across these markets. At the same time, international flows are found to facilitate the propagation of shocks in the direction of the currency market from the equity market, in line with the portfolio rebalancing hypothesis wherein equity market fluctuations lead to a subsequent correction in the currency market. The findings have important implications for investors and policy makers regarding the role of international capital flows as a facilitator of informational spillovers in emerging equity and currency markets.

Keywords: Capital flows, Emerging markets, Connectedness, Quantile causality

JEL Classification: C22, F30, G15

Suggested Citation

Bathia, Deven and Demirer, Riza and Ferrer Lapeña, Roman and Raheem, Ibrahim, Cross-Border Capital Flows and Information Spillovers across the Equity and Currency Markets in Emerging Economies (May 6, 2021). Available at SSRN: https://ssrn.com/abstract=3841057 or http://dx.doi.org/10.2139/ssrn.3841057

Deven Bathia

Queen Mary University of London ( email )

The Bancroft Building
Mile End Road
London, E1 4NS
United Kingdom

Riza Demirer (Contact Author)

Southern Illinois University Edwardsville - Department of Economics & Finance ( email )

Department of Economics & Finance
Alumni Hall 3145
Edwardsville, IL 62026-1102
United States
(618) 650-2939 (Phone)
(618) 650-3047 (Fax)

HOME PAGE: http://www.siue.edu/~rdemire/

Economic Research Forum (ERF)

21 Al-Sad Al-Aaly St.
(P.O. Box: 12311)
Cairo, Cairo
Egypt

HOME PAGE: http://erf.org.eg/affiliates/riza-demirer-3/

Roman Ferrer Lapeña

Faculty of Economics. University of Valencia

Avda Tarongers s/n 46071
Valencia, Valencia 46023
Spain

Ibrahim Raheem

University of Ibadan - Department of Economics ( email )

Department of Economics
Ibadan, OK Oyo State 900001
Nigeria

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