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Portfolio investment flows to emerging markets

Author

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  • Gooptu, Sudarshan

Abstract

The 1990s brought developing countries the heaviest private capital flows since the early 1980s, says the author - mainly bond and equity financing, rather than medium- and long-term lending by commercial banks. Flows were mainly to Asia in the first half and Latin America in the second half. Market participants believe that most inflows of portfolio investment (especially in Latin America) reflected the return of flight capital by domestic residents with overseas holdings. This and possible herding by foreign investors in a few countries, such as Mexico, could at the margin make securities prices volatile in the emerging markets and cause rapid switching of portfolios between markets (between developed and emerging markets and between emerging markets). This could make macroeconomic management difficult for policymakers. Some contend that if external portfolio investment flows into an emerging market are the result of external factors - such as the U.S. recession and low international interest rates - the increased demand for shares in a relatively liquid emerging stock market may overheat the stock markets and lead to an appreciation of the real exchange rates in these countries. Any attempt to counteract this appreciation of the domestic currency by the monetary authorities, by devaluing the nominal exchange rate, will increase international reserves and perhaps be inflationary. If, on the other hand, policymakers dilute the effect of the real appreciation by sterilizing incoming resources through open market operations, this could increase domestic debt and possibly domestic interest rates. This might attract further inflows from abroad and create a vicious cycle of expected devaluations - which could further appreciate the domestic currency. What is crucial is the policymakers'perception of whether the inflows are temporary. That is why it is important to know the source of portfolio inflows. If the inflows are coming from investors with long-term capital appreciation motives, such as the large institutional investors, and the developing country remains on a path of sustained market-oriented reform aimed at long-run growth, these inflows should continue and even grow in the near future. As more comprehensive data become available, it is important to determine whether these inflows from abroad are intended to be short-term or long-term. The author provides a comprehensive database of transaction-level information on different types of instruments and a glossary of portfolio investment terms.

Suggested Citation

  • Gooptu, Sudarshan, 1993. "Portfolio investment flows to emerging markets," Policy Research Working Paper Series 1117, The World Bank.
  • Handle: RePEc:wbk:wbrwps:1117
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Harvey, Campbell R, 1995. "Predictable Risk and Returns in Emerging Markets," Review of Financial Studies, Society for Financial Studies, vol. 8(3), pages 773-816.
    2. Jokung N., Octave, 1998. "Timing of investments in emerging markets: the case of Malaysia and Singapore," Journal of Multinational Financial Management, Elsevier, vol. 8(2-3), pages 199-210, September.
    3. Reinhart, Carmen & Khan, Mohsin, 1995. "Macroeconomic Management in APEC Economies: The Response to Capital Inflows," MPRA Paper 8148, University Library of Munich, Germany.
    4. Jean-François L'Her & Jean-Marc Suret, 1997. "Liberalization, Political Risk and Stock Market Returns in Emerging Markets," CIRANO Working Papers 97s-15, CIRANO.
    5. Guillermo A. Calvo & Leonardo Leiderman & Carmen M. Reinhart, 1996. "Inflows of Capital to Developing Countries in the 1990s," Journal of Economic Perspectives, American Economic Association, vol. 10(2), pages 123-139, Spring.
    6. E Philip Davis, 1996. "The Role of Institutional Investors in the Evolution of Financial Structure and Behaviour," RBA Annual Conference Volume,in: Malcom Edey (ed.), The Future of the Financial System Reserve Bank of Australia.
    7. Gooptu, Sudarshan, 1996. "Emerging policy issues in development finance," The Quarterly Review of Economics and Finance, Elsevier, vol. 36(Supplemen), pages 85-100.
    8. Chuhan, Punam & DEC, 1994. "Are institutional investors an important source of portfolio investment in emerging markets?," Policy Research Working Paper Series 1243, The World Bank.
    9. Welch, John H., 1996. "Capital flows and economic growth: Reflections on Latin America in the 1990s," The Quarterly Review of Economics and Finance, Elsevier, vol. 36(Supplemen), pages 101-114.
    10. Michael P. Dooley & Kenneth M. Kletzer, 1994. "Capital flight, external debt, and domestic policies," Economic Review, Federal Reserve Bank of San Francisco, pages 29-37.
    11. Y. Bai, 2014. "Country factors in stock returns: reconsidering the basic method," Applied Financial Economics, Taylor & Francis Journals, vol. 24(13), pages 871-888, July.
    12. Angelos A. Antzoulatos, 1997. "On the determinants and resilience of bond flows to LDCs, 1990-1995: evidence from Argentina, Brazil and Mexico," Research Paper 9703, Federal Reserve Bank of New York.
    13. Kuhan Harichandra & S. M. Thangavelu, 2004. "Institutional Investors, Financial Sector Development And Economic Growth in OECD Countries," Departmental Working Papers wp0405, National University of Singapore, Department of Economics.
    14. Sader, Frank, 1993. "Privatization and foreign investment in the developing world, 1988-92," Policy Research Working Paper Series 1202, The World Bank.
    15. Naitram Simon M., 2014. "Offshore Financial Centers in the Global Capital Network," Global Economy Journal, De Gruyter, vol. 14(3-4), pages 1-17, October.
    16. Urrutia, Jorge L, 1995. "Tests of Random Walk and Market Efficiency for Latin American Emerging Equity Markets," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 18(3), pages 299-309, Fall.
    17. Jeffrey A. Frankel & Chudozie Okongwu, 1995. "Liberalized Portfolio Capital Inflows in Emerging Capital Markets: Sterilization, Expectations, and the Incompleteness of Interest Rate Convergence," NBER Working Papers 5156, National Bureau of Economic Research, Inc.
    18. Lamberte, Mario B., 1994. "Managing Surges in Capital Inflows: The Philippines Case," Discussion Papers DP 1994-20, Philippine Institute for Development Studies.
    19. Sarno, Lucio & Taylor, Mark P., 1999. "Hot money, accounting labels and the permanence of capital flows to developing countries: an empirical investigation," Journal of Development Economics, Elsevier, vol. 59(2), pages 337-364, August.

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