Foreign Investment Fluctuations and Emerging Market Stock Returns: The Case of Mexico

43 Pages Posted: 22 Jun 2007

See all articles by John Clark

John Clark

Federal Reserve Banks - Federal Reserve Bank of New York

Elizabeth Berko

Federal Reserve Banks - Federal Reserve Bank of New York

Date Written: May 1997

Abstract

We investigate the economically and statistically significant positive correlation between monthly foreign purchases of Mexican stocks and Mexican stock returns. We find that a 1 percent of market capitalization surprise foreign inflow is associated with a 13 percent increase in Mexican stock prices. We explore whether this correlation might be explained by permanent reductions in conditional expected returns resulting from expansion of the investor base along the lines modeled by Merton (1987), or correlations with other factors causing returns, price pressures, or positive feedback strategies by foreign investors, and conclude that the available evidence is consistent with the base-broadening hypothesis.

Keywords: foreign investment fluctuation, Mexican stock prices

JEL Classification: F12, G12, G15

Suggested Citation

Clark, John and Berko, Elizabeth, Foreign Investment Fluctuations and Emerging Market Stock Returns: The Case of Mexico (May 1997). FRB of New York Staff Report No. 24, Available at SSRN: https://ssrn.com/abstract=993813 or http://dx.doi.org/10.2139/ssrn.993813

John Clark (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of New York

Elizabeth Berko

Federal Reserve Banks - Federal Reserve Bank of New York

33 Liberty Street
New York, NY 10045
United States

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