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Foreign equity flows: Boon or bane to the liquidity of Malaysian stock market?

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  • Liew, Ping-Xin
  • Lim, Kian-Ping
  • Goh, Kim-Leng

Abstract

This paper examines the impact of gross foreign equity inflows on aggregate liquidity of the Malaysian stock market using newly assembled foreign trading data and the best performing bid-ask spread proxy. Employing vector autoregression, we discover a one-way causality from gross inflows to aggregate liquidity, and foreign investors erode liquidity of the Malaysian stock market. Additional analyses reveal that uncertainties in the U.S. markets negatively affect aggregate liquidity through the flows of foreign institutions, whose positive feedback trading destabilizes the local bourse. Despite the shocks, there is sufficient liquidity provision from local state-backed institutional funds and local proprietary day traders.

Suggested Citation

  • Liew, Ping-Xin & Lim, Kian-Ping & Goh, Kim-Leng, 2018. "Foreign equity flows: Boon or bane to the liquidity of Malaysian stock market?," The North American Journal of Economics and Finance, Elsevier, vol. 45(C), pages 161-181.
    • Handle: RePEc:eee:ecofin:v:45:y:2018:i:c:p:161-181
    DOI: 10.1016/j.najef.2018.02.007
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    More about this item

    Keywords

    Foreign equity flows; Aggregate liquidity; Malaysian stock market; Vector autoregression; VIX;
    All these keywords.

    JEL classification:

    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

    Statistics

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