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The causal effects of equity flows: Evidence from Korea

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  • Kwak, Jun Hee
  • Han, Bada
  • Lee, Jae Young

Abstract

In this paper, we estimate the causal effects of gross equity inflows into an open economy using the Granular Instrument Variable (GIV) constructed from regulatory data on foreign investments in the Korean stock market. We find that a one-standard-deviation increase in monthly foreign inflows into the Korean stock market results in approximately a 2.2% rise in the Korean benchmark stock price index and a 1.0% appreciation of the Korean won against the US dollar. These foreign inflows also lead to drops in short-term treasury bond rates and improvements in dollar funding conditions. Our empirical results are consistent with the Inelastic Market Hypothesis.

Suggested Citation

  • Kwak, Jun Hee & Han, Bada & Lee, Jae Young, 2025. "The causal effects of equity flows: Evidence from Korea," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 102(C).
    • Handle: RePEc:eee:intfin:v:102:y:2025:i:c:s1042443125000654
    DOI: 10.1016/j.intfin.2025.102175
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    Keywords

    Foreign investor; Capital flow; Gross equity flow; Stock price; Granular instrument; Inelastic market hypothesis;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements

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