Modeling the Demand for Emerging Market Assets
This paper addresses the problem of estimating the aggregate international demand schedule for emerging market (EM) securities as an asset class. The standard â€˜push-pullâ€™ model of capital flows is modified by reference to recent work on portfolio choice in the context of credit rationing leading to a simultaneous equation model that determines EM yield and capital flows together. Interaction effects include lagged flows and yields to reflect herding and asset bubbles, with a time-varying risk aversion variable affecting yields and flows. This model is then tested on monthly data for US bond purchases, using the General-to-Specific Approach (GETS) to find significant variables, lags, and shock dummies for yield spread and bond flows separately; followed by a Full Information Maximum Likelihood (FIML) estimation of the two equations together. The results are robust and give a very good fit for both yields and flows, contributing a valuable insight into the dominant impact of short-term shifts in the demand schedule on emerging markets.
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