Cross-border capital flows and return dynamics in emerging stock markets: Relative roles of equity and debt flows. (December 2020)

• Record Type: Journal Article
• Authors: Bathia, Deven; Bouras, Christos; Demirer, Riza; Gupta, Rangan
• Is Part Of: Journal of international money and finance. Volume 109(2020)
• Publication Date: 2020-12
• Subjects: Cross-border portfolio flows -- Emerging stock markets -- Panel GARCH; C22 -- F00 -- G15; International finance -- Periodicals; Foreign exchange -- Periodicals; Finances internationales -- Périodiques; Change -- Périodiques; Foreign exchange; International finance; Periodicals; 332.04205
• DOI: 10.1016/j.jimonfin.2020.102258
• Languages: English
• ISSNs: 0261-5606

Abstract

Highlights: Equity and debt flows possess incremental information over emerging stock market returns and volatility. The explanatory power of debt flows is relatively stronger than that of equity flows. Debt flows remain significant even after controlling for global risk, bank credit flows and country-level liquidity. Equity flows plays a significant role in driving return dynamics in emerging stock markets during the post-crisis period. Debt flows serve as a determinant of idiosyncratic risks at the country level. Abstract: This paper examines the effect of cross-border capital flows on financial markets by focusing on the composition of flows, viz. equity and debt flows, and its relative effect on emerging stock market returns and volatility. Using a panel GARCH approach on nine emerging market economies, we find that both equity and debt flows possess incremental information over stock market returns and volatility that is not captured by aggregate capital market risk factors. While the explanatory power of debt flows is relatively stronger and more robust, even after controlling for world market return, global risk, bank credit flows and country-level liquidity, we find that equity flows assume significant explanatory power, particularly during the post-global financial crisis period. The findings overall suggest that emerging stock markets have become particularly sensitive to cross-border capital flows following the great credit crunch, with significant effects on idiosyncratic risks at the country level, while accounting for the composition of portfolio flows can add further explanatory power to stock market models.