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Foreign investment fluctuations and emerging market stock returns: the case of Mexico

  • John Clark
  • Elizabeth Berko
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    We investigate the economically and statistically significant positive correlation between monthly foreign purchases of Mexican stocks and Mexican stock returns. We find that a 1 percent of market capitalization surprise foreign inflow is associated with a 13 percent increase in Mexican stock prices. We explore whether this correlation might be explained by permanent reductions in conditional expected returns resulting from expansion of the investor base along the lines modeled by Merton (1987), or correlations with other factors causing returns, price pressures, or positive feedback strategies by foreign investors, and conclude that the available evidence is consistent with the base-broadening hypothesis.

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    Paper provided by Federal Reserve Bank of New York in its series Staff Reports with number 24.

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    Date of creation: 1997
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    Handle: RePEc:fip:fednsr:24
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    1. Errunza, Vihang & Losq, Etienne, 1985. " International Asset Pricing under Mild Segmentation: Theory and Test," Journal of Finance, American Finance Association, vol. 40(1), pages 105-24, March.
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    10. John Mullin, 1993. "Emerging equity markets in the global economy," Quarterly Review, Federal Reserve Bank of New York, issue Sum, pages 54-83.
    11. Franklin Allen & Douglas Gale, . "Limited Market Participation and Volatility of Asset Prices (Revision of 14-91) (Reprint 043)," Rodney L. White Center for Financial Research Working Papers 2-92, Wharton School Rodney L. White Center for Financial Research.
    12. Claudio M. Loser & Eliot Kalter, 1992. "Mexico: The Strategy to Achieve Sustained Economic Growth," IMF Occasional Papers 99, International Monetary Fund.
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    14. Shleifer, Andrei, 1986. " Do Demand Curves for Stocks Slope Down?," Journal of Finance, American Finance Association, vol. 41(3), pages 579-90, July.
    15. Guillermo A. Calvo & Leonardo Leiderman & Carmen M. Reinhart, 1994. "Inflows of Capital to Developing Countries in the 1990s: Causes and Effects," IDB Publications (Working Papers) 5718, Inter-American Development Bank.
    16. Fama, Eugene F & French, Kenneth R, 1988. "Permanent and Temporary Components of Stock Prices," Journal of Political Economy, University of Chicago Press, vol. 96(2), pages 246-73, April.
    17. Franklin Allen & Douglas Gale, . "Limited Market Participation and Volatility of Asset Prices (Revised: 2-92)," Rodney L. White Center for Financial Research Working Papers 14-91, Wharton School Rodney L. White Center for Financial Research.
    18. Eun, Cheol S & Janakiramanan, S, 1986. " A Model of International Asset Pricing with a Constraint on the Foreign Equity Ownership," Journal of Finance, American Finance Association, vol. 41(4), pages 897-914, September.
    19. Kadlec, Gregory B & McConnell, John J, 1994. " The Effect of Market Segmentation and Illiquidity on Asset Prices: Evidence from Exchange Listings," Journal of Finance, American Finance Association, vol. 49(2), pages 611-36, June.
    20. Hietala, Pekka T, 1989. " Asset Pricing in Partially Segmented Markets: Evidence from the Finnish Market," Journal of Finance, American Finance Association, vol. 44(3), pages 697-718, July.
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