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Determining the Interaction of the International Portfolio Flows with Exchange Rate Volatility in Developing Countries

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  • Utku Altunoz

    (Sinop University)

Abstract

The aim of this study is to examine the effect of the bond portfolio and equity inflows on the exchange rate dynamics for a set of developing countries, including Turkey, Hungary, New Zealand, India, Russia, Poland, Brazil and Argentina over the period 1997:01-2017:12 by using a Markov-switching model. According to the analysis results, the net bond inflows lead to an increase in the likelihood of a high volatility regime in Turkey and Russia and increases the probability of transition from the high volatility regime to the low volatility regime in Hungary. Additionally, the net bond inflows from New Zealand and Poland to the United States (US) rise the possibility of remaining in the low volatility regime. The net equity inflows from Turkey and Poland to the US lead to a rise in the possibility of remaining in the high volatility regime. Besides, the net equity inflows from Brazil and Argentina to the US lead to a decline in the possibility of remaining in the low volatility state. In the light of the empirical results supporting the "return chasing" hypothesis, this paper argues that credit controls on short-term financial inflows could be an effective means in stabilizing the foreign exchange market.

Suggested Citation

  • Utku Altunoz, 2020. "Determining the Interaction of the International Portfolio Flows with Exchange Rate Volatility in Developing Countries," World Journal of Applied Economics, WERI-World Economic Research Institute, vol. 6(1), pages 41-54, June.
    • Handle: RePEc:ana:journl:v:6:y:2020:i:1:p:41-54
    DOI: 10.22440/wjae.6.1.3
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    More about this item

    Keywords

    Exchange rate volatility; Portfolio flows; Markov-switching model; Emerging markets;
    All these keywords.

    JEL classification:

    • F30 - International Economics - - International Finance - - - General
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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