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Foreign Investors Under Stress

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Author Info

  • Ila Patnaik
  • Ajay Shah
  • Nirvikar Singh

Abstract

Emerging market policy makers have been concerned about the financial stability implications of financial globalization. These concerns are focused on behavior under stressed conditions. Do tail events in the home country trigger off extreme responses by foreign investors – are foreign investors `fair weather friends'? In this, is there asymmetry between the response of foreign investors to very good versus very bad days? Do foreign investors have a major impact on domestic markets through large inflows or outflows – are they ‘big fish in a small pond’? Do extreme events in world markets induce extreme behavior by foreign investors, thus making them vectors of crisis transmission? We propose a modified event study methodology focused on tail events, which yields evidence on these questions. The results, for India, do not suggest that financial globalization has induced instability on the equity market.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 13/122.

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Length: 31
Date of creation: 22 May 2013
Date of revision:
Handle: RePEc:imf:imfwpa:13/122

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Related research

Keywords: Foreign investment; India; Stock markets; Emerging markets; Economic models; equity market; financial globalization; stock market index; stock returns; financial stability; international finance; financial system; financial economics; stock market indexes; stock price; stock prices; equity markets; local stock market; stock market price; financial markets; financial institutions; international capital; emerging market stock; stock market fluctuations; bond; bond price; hedge; stock market declines; portfolio investment; hedge funds; asset markets;

This paper has been announced in the following NEP Reports:

References

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  1. Ajay Shah & Ila Patnaik & Matthieu Stigler, 2010. "Understanding the ADR premium under market segmentation," Working Papers id:2826, eSocialSciences.
  2. Choe, Hyuk & Kho, Bong-Chan & Stulz, Rene M., 1999. "Do foreign investors destabilize stock markets? The Korean experience in 1997," Journal of Financial Economics, Elsevier, vol. 54(2), pages 227-264, October.
  3. Hartmann, Philipp & Straetmans, Stefan & de Vries, Casper, 2001. "Asset market linkages in crisis periods," Working Paper Series 0071, European Central Bank.
  4. Brown, Stephen J. & Warner, Jerold B., 1980. "Measuring security price performance," Journal of Financial Economics, Elsevier, vol. 8(3), pages 205-258, September.
  5. Ajay Shah & Ila Patnaik, 2005. "India's Experience with Capital Flows: The Elusive Quest for a Sustainable Current Account Deficit," NBER Working Papers 11387, National Bureau of Economic Research, Inc.
  6. Shah, Ajay & Patnaik, Ila, 2011. "India's financial globalisation," Working Papers 11/79, National Institute of Public Finance and Policy.
  7. Meziane Lasfer & Sharon Xiaowen Lin & Gulnur Muradoglu, 2012. "Optimism in foreign investors," Review of Behavioral Finance, Emerald Group Publishing, vol. 4(1), pages 8-27, September.
  8. Kenneth A. Froot & Tarun Ramadorai, 2001. "The Information Content of International Portfolio Flows," NBER Working Papers 8472, National Bureau of Economic Research, Inc.
  9. Zeileis, Achim & Shah, Ajay & Patnaik, Ila, 2010. "Testing, monitoring, and dating structural changes in exchange rate regimes," Computational Statistics & Data Analysis, Elsevier, vol. 54(6), pages 1696-1706, June.
  10. Lasfer, M. Ameziane & Melnik, Arie & Thomas, Dylan C., 2003. "Short-term reaction of stock markets in stressful circumstances," Journal of Banking & Finance, Elsevier, vol. 27(10), pages 1959-1977, October.
  11. Cumperayot, Phornchanok & Keijzer, Tjeert & Kouwenberg, Roy, 2006. "Linkages between extreme stock market and currency returns," Journal of International Money and Finance, Elsevier, vol. 25(3), pages 528-550, April.
  12. Fama, Eugene F, et al, 1969. "The Adjustment of Stock Prices to New Information," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 10(1), pages 1-21, February.
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