IDEAS home Printed from https://ideas.repec.org/p/col/000122/010663.html
   My bibliography  Save this paper

Do foreign portfolio flows increase risk in emerging stock markets? Evidence from six Latin American countries 1999 -2008

Author

Listed:
  • Diego Alonso Agudelo Rueda

    ()

  • Milena Castaño

Abstract

Foreign portfolio flows have been blamed for causing instability in emerging markets, especially during financial crises. This study measured the effect of foreign capital flows on volatility and exposure to world market risk in the six largest Latin American stock markets: Argentina, Brazil, Colombia, Chile, Mexico and Peru, for around 10 years including the 2008’s World financial crisis. This will test whether these flows cause instability for those markets and increase their exposure to international stock market returns. A proprietary database, from Emerging Portoflio.com and time series models, both univariate (ARCH - GARCH) and multivariate (VAR), are used to estimate the effect foreign portfolio flows on the risk variables and the causality of these effects. We found no strong evidence to support the hypothesis that foreign flows cause instability in the Latin American stock markets, in spite of some evidence of causing price pressure. Instead, the evidence points to a strong dependence of market returns on international stock and foreign exchange markets, both in means and in volatility, instrumental to transmit crisis to those markets.

Suggested Citation

  • Diego Alonso Agudelo Rueda & Milena Castaño, 2011. "Do foreign portfolio flows increase risk in emerging stock markets? Evidence from six Latin American countries 1999 -2008," DOCUMENTOS DE TRABAJO CIEF 010663, UNIVERSIDAD EAFIT.
  • Handle: RePEc:col:000122:010663
    as

    Download full text from publisher

    File URL: http://repository.eafit.edu.co/bitstream/10784/668/1/2011_19_Diego_Agudelo.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. Bae, Kee-Hong & Chan, Kalok & Ng, Angela, 2004. "Investibility and return volatility," Journal of Financial Economics, Elsevier, vol. 71(2), pages 239-263, February.
    2. Bekaert, Geert & Harvey, Campbell R., 2003. "Emerging markets finance," Journal of Empirical Finance, Elsevier, pages 3-56.
    3. Errunza, Vihang R. & Miller, Darius P., 2000. "Market Segmentation and the Cost of the Capital in International Equity Markets," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 35(04), pages 577-600, December.
    4. 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.
    5. Nelson, Daniel B, 1991. "Conditional Heteroskedasticity in Asset Returns: A New Approach," Econometrica, Econometric Society, vol. 59(2), pages 347-370, March.
    6. Stiglitz, Joseph E., 2000. "Capital Market Liberalization, Economic Growth, and Instability," World Development, Elsevier, vol. 28(6), pages 1075-1086, June.
    7. Michael Frenkel & Lukas Menkhoff, 2004. "Are Foreign Institutional Investors Good for Emerging Markets?," The World Economy, Wiley Blackwell, pages 1275-1293.
    8. Hyuk Choe & Bong-Chan Kho & René M. Stulz, 2005. "Do Domestic Investors Have an Edge? The Trading Experience of Foreign Investors in Korea," Review of Financial Studies, Society for Financial Studies, vol. 18(3), pages 795-829.
    9. Froot, Kenneth A. & O'Connell, Paul G. J. & Seasholes, Mark S., 2001. "The portfolio flows of international investors," Journal of Financial Economics, Elsevier, vol. 59(2), pages 151-193, February.
    10. Geert Bekaert & Campbell R. Harvey, 2000. "Capital Flows and the Behavior of Emerging Market Equity Returns," NBER Chapters,in: Capital Flows and the Emerging Economies: Theory, Evidence, and Controversies, pages 159-194 National Bureau of Economic Research, Inc.
    11. Brennan, Michael J & Cao, H Henry, 1997. " International Portfolio Investment Flows," Journal of Finance, American Finance Association, vol. 52(5), pages 1851-1880, December.
    12. Calvo, Guillermo A. & Mendoza, Enrique G., 2000. "Rational contagion and the globalization of securities markets," Journal of International Economics, Elsevier, pages 79-113.
    13. Kim, E Han & Singal, Vijay, 2000. "Erratum [Stock Market Openings: Experience of Emerging Economies]," The Journal of Business, University of Chicago Press, vol. 73(4), October.
    14. Bekaert, G. & Harvey, C. R. & Lumsdaine, R. L., 2002. "The dynamics of emerging market equity flows," Journal of International Money and Finance, Elsevier, vol. 21(3), pages 295-350, June.
    15. Ho, Thomas & Stoll, Hans R., 1981. "Optimal dealer pricing under transactions and return uncertainty," Journal of Financial Economics, Elsevier, pages 47-73.
    16. Sushil Bikhchandani & David Hirshleifer & Ivo Welch, 1998. "Learning from the Behavior of Others: Conformity, Fads, and Informational Cascades," Journal of Economic Perspectives, American Economic Association, vol. 12(3), pages 151-170, Summer.
    17. Muller, Aline & Verschoor, Willem F.C., 2007. "Asian foreign exchange risk exposure," Journal of the Japanese and International Economies, Elsevier, vol. 21(1), pages 16-37, March.
    18. Kim, E Han & Singal, Vijay, 2000. "Stock Market Openings: Experience of Emerging Economies," The Journal of Business, University of Chicago Press, vol. 73(1), pages 25-66, January.
    19. Anthony Richards, 2004. "Big Fish in Small Ponds: The Trading Behaviour and Price Impact of Foreign Investors in Asian Emerging Equity Markets," RBA Research Discussion Papers rdp2004-05, Reserve Bank of Australia.
    20. Glosten, Lawrence R. & Milgrom, Paul R., 1985. "Bid, ask and transaction prices in a specialist market with heterogeneously informed traders," Journal of Financial Economics, Elsevier, vol. 14(1), pages 71-100, March.
    21. Richards, Anthony, 2005. "Big Fish in Small Ponds: The Trading Behavior and Price Impact of Foreign Investors in Asian Emerging Equity Markets," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 40(01), pages 1-27, March.
    22. Shiller, Robert J, 1981. "Do Stock Prices Move Too Much to be Justified by Subsequent Changes in Dividends?," American Economic Review, American Economic Association, pages 421-436.
    23. Shiller, Robert J, 1981. "Do Stock Prices Move Too Much to be Justified by Subsequent Changes in Dividends?," American Economic Review, American Economic Association, pages 421-436.
    24. Dornbusch, Rudiger & Fischer, Stanley, 1980. "Exchange Rates and the Current Account," American Economic Review, American Economic Association, pages 960-971.
    25. Mark J. Flannery & Aris A. Protopapadakis, 2002. "Macroeconomic Factors Do Influence Aggregate Stock Returns," Review of Financial Studies, Society for Financial Studies, vol. 15(3), pages 751-782.
    26. Calvo, Guillermo A. & Mendoza, Enrique G., 2000. "Rational contagion and the globalization of securities markets," Journal of International Economics, Elsevier, pages 79-113.
    27. Peter Blair Henry, 2000. "Stock Market Liberalization, Economic Reform, and Emerging Market Equity Prices," Journal of Finance, American Finance Association, vol. 55(2), pages 529-564, April.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Kechagia, Polyxeni & Metaxas, Theodore, 2016. "FDI in Latin America: The case of Peru," MPRA Paper 72399, University Library of Munich, Germany.

    More about this item

    Keywords

    Foreign portfolio flows; Emerging Markets; market risk; ARCH-GARCH; VAR;

    JEL classification:

    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • G01 - Financial Economics - - General - - - Financial Crises
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:col:000122:010663. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Centro de Investigaciones Económicas y Financieras (CIEF)). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.