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The Dynamics Of Foreign Portfolio Investment And Exchange Rate: An Interconnection Approach In Asean

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  • Ferry Syarifuddin

Abstract

This paper examines the spatial dependence of foreign portfolio investment (FPI) inflows between ASEAN countries from 2002Q1-2018Q4 utilizing the spatial econometric approach. In particular, to enrich the resultsof our research we also review the relationship between exchange rates and macroeconomic factors on the FPI in Indonesia. The empirical results show that there is a competitive relationship in FPI between ASEAN countries that indicates crowding out of FPI in the host country is most likely to occur when third-country experiences crowding in its FPI inflow. We also show that the exchange rate dynamics in the host and third country do not significantly affect FPI in the host country. Furthermore, the results indicate that interest rate differential, inflation, economic growth, and government debt rating in host countries, also inflation, economic growth, and government debt rating in neighboring countries are responsible for the inflow of FPI into host countries in ASEAN. In the Indonesia case study, our empirical results show that exchange rates affect bond and equity inflows, and also exchange rate volatility affects foreign equity markets and total portfolio inflows inIndonesia. In addition, we find the importance of interest rate differential and the VIX index for Indonesia's portfolios market

Suggested Citation

  • Ferry Syarifuddin, 2020. "The Dynamics Of Foreign Portfolio Investment And Exchange Rate: An Interconnection Approach In Asean," Working Papers WP/08/2020, Bank Indonesia.
    • Handle: RePEc:idn:wpaper:wp082020
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    More about this item

    Keywords

    foreign portfolio investment; exchange rates; macroeconomics; spatial panel econometrics; spillover effects;
    All these keywords.

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models
    • R12 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Size and Spatial Distributions of Regional Economic Activity; Interregional Trade (economic geography)

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