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A note on US institutional equity flows to Brazil

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  • Joseph J. French
  • Wei-Xuan Li
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    Abstract

    Purpose – The purpose of this research is to understand the long-run dynamics between returns, commodity prices, volatility, and US equity investment into Brazil. This research is prompted by the rapid increase in foreign equity investment into Brazil. Design/methodology/approach – To address long-run dynamic nature of the variables, multivariate autoregressive model is fitted for the period of January 1998 to May 2008. To achieve identification of this model, restrictions are imposed based on underlying financial theory and the nature of the data. Findings – The paper finds consistent with a long literature, that US institutional equity investment is forecasted by past returns on the Brazilian stock index (BOVESPA). The paper also documents the important role of commodity prices in forecasting US equity flows to Brazil, a variable that has not been considered in much of existing literature. Finally, the paper uncovers a strong relationship between US equity flows to Brazil and measures of risk. The paper documents that an unexpected shock to US equity flows increases the volatility of the Brazilian equity market beyond what could be predicted by other variables in the system. The strong joint dynamics among US portfolio equity flows and the risk and return of the Brazilian equity market demonstrates the need for policy makers in Brazil to monitor short-term portfolio flows. Originality/value – There is a broad literature on the dynamics of US investment in emerging and developed markets but very little work focuses directly on Brazil. Additionally, this work is one of the first to explicitly consider the role of commodity prices on the dynamics of foreign equity flows to resource rich nations.

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    Bibliographic Info

    Article provided by Emerald Group Publishing in its journal Review of Accounting and Finance.

    Volume (Year): 11 (2012)
    Issue (Month): 3 ()
    Pages: 298-315

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    Handle: RePEc:eme:rafpps:v:11:y:2012:i:3:p:298-315

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    Related research

    Keywords: Brazil; Commodities; Equity capital; Portfolio equity flows; SVARX; United States of America;

    References

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    15. Bohn, Henning & Tesar, Linda L, 1996. "U.S. Equity Investment in Foreign Markets: Portfolio Rebalancing or Return Chasing?," American Economic Review, American Economic Association, vol. 86(2), pages 77-81, May.
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