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The Causal Effects of Equity Flows: Evidence from Korea

Author

Listed:
  • Jun Hee Kwak

    (Department of Economics, Sogang University, Seoul, Korea)

  • Bada Han

    (InternationalMonetary Fund, Strategy, Policy, and Review Department)

  • Jaeyoung Lee

    (Bank of Korea, Foreign ExchangeMarket Team)

Abstract

In this paper,we estimate the causal effects of gross equity inflows into an open economy using the Granular Instrument Variable (GIV) constructed from regulatory data on foreign investments in the Korean stock market. We find that a one-standard-deviation increase in monthly foreign inflows into the Korean stock market results in approximately a 2.2% rise in the Korean benchmark stock price index and a 1.0% appreciation of the Korean won against the US dollar. These foreign inflows also lead to drops in short-term treasury bond rates and improvements in dollar funding conditions. Our empirical results are consistent with the InelasticMarket Hypothesis.

Suggested Citation

  • Jun Hee Kwak & Bada Han & Jaeyoung Lee, 2023. "The Causal Effects of Equity Flows: Evidence from Korea," Working Papers 2307, Nam Duck-Woo Economic Research Institute, Sogang University (Former Research Institute for Market Economy).
    • Handle: RePEc:sgo:wpaper:2307
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    Keywords

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    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements

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