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Are Foreign Institutional Investors Good for Emerging Markets?

  • Frenkel, Michael
  • Menkhoff, Lukas

Portfolio flows channeled via institutional investors were the most dynamic capital flows to emerging markets in the 1990s. We use an asymmetric information framework to derive five propositions, to integrate empirical evidence and to suggest policy implications. Opaque information in emerging markets hinders foreign market entrants. Moreover, following financial opening, institutional investors can worsen the position of local investors due to unintentionally creating unbalanced diversification and obscure risks. Finally, foreign institutional investors often amplify investment booms and financial contagion. Therefore, capital account and financial market liberalization needs to be accompanied by careful regulation.

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Paper provided by Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät in its series Hannover Economic Papers (HEP) with number dp-283.

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Length: 30 pages
Date of creation: Sep 2003
Date of revision:
Handle: RePEc:han:dpaper:dp-283
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