Determining the Interaction of the International Portfolio Flows with Exchange Rate Volatility in Developing Countries
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May 25, 2020
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Abstract
The aim of this study is to examine the effect of the bond portfolio and equity inflows on the exchange rate dynamics for a set of developing countries, including Turkey, Hungary, New Zealand, India, Russia, Poland, Brazil and Argentina over the period 1997:01-2017:12 by using a Markov-switching model. According to the analysis results, the net bond inflows lead to an increase in the likelihood of a high volatility regime in Turkey and Russia and increases the probability of transition from the high volatility regime to the low volatility regime in Hungary. Additionally, the net bond inflows from New Zealand and Poland to the United States (US) rise the possibility of remaining in the low volatility regime. The net equity inflows from Turkey and Poland to the US lead to a rise in the possibility of remaining in the high volatility regime. Besides, the net equity inflows from Brazil and Argentina to the US lead to a decline in the possibility of remaining in the low volatility state. In the light of the empirical results supporting the "return chasing" hypothesis, this paper argues that credit controls on short-term financial inflows could be an effective means in stabilizing the foreign exchange market.
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Altunöz, U. (2020) “Determining the Interaction of the International Portfolio Flows with Exchange Rate Volatility in Developing Countries”, World Journal of Applied Economics, 6(1), pp. 41-54. doi: 10.22440/wjae.6.1.3.
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References
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Chowdhury, A. R. (1993). Does Exchange Rate Volatility Depress Trade Flows? Evidence from Error-Correction Models. The Review of Economics and Statistics, 75, 700-6. doi:10.2307/2110025
Çiçek, M. (2010). Interest Rates, Foreign Exchange Rates and Stock Prices in Turkey: Price and Volatility Spillover Effects. Ankara Üniversitesi SBF Dergisi, 65, 1-28. doi:10.1501/SBFder0000002170
Clark, J., Converse, N., Coulibaly, B., & Kamin, S. B. (2019). Emerging Market Capital Flows and U.S. Monetary Policy. International Finance. doi:10.1111/infi.12355
Eichengreen, B., & Gupta, P. (2015). Tapering Talk: The Impact of Expectations of Reduced Federal Reserve Security Purchases on Emerging Markets. Emerging Markets Review, 25, 1-15. doi:10.1016/j.ememar.2015.07.002
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Güler, A. (2017). Modeling Exchange Rate Volatility under Volatile Economic Conditions: A Dynamic Time Series Analysis for Turkey (in Turkish). International Journal of Academic Value Studie, 3, 39-47. doi:10.23929/javs.435
Hamilton, J. D. (1989). A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle. Econometrica, 57, 357-84. doi:10.2307/1912559
Hansen, B. E. (1992). The Likelihood Ratio Test under Nonstandard Conditions: Testing the Markov Switching Model of GNP. Journal of Applied Econometrics, 7, S61--S82. doi:10.1002/jae.3950070506
Hau, H., & Rey, H. (2006). Exchange Rates, Equity Prices, and Capital Flows. The Review of Financial Studies, 19, 273-317. doi:10.1093/rfs/hhj008
Jabeen, M., & Ismail, A. (2016). Exchange Rates and International Portfolio Flows: Evidence from Pakistan.
Kılıçarslan, Z. (2018). Determinants of Exchange Rate Volatility: Empirical Evidence for Turkey. Journal of Economics Finance and Accounting, 5, 204-13. doi:10.17261/Pressacademia.2018.825
Li, S., Haan, J., & Scholtens, B. (2018). Are International Fund Flows Related to Exchange Rate Dynamics? Open Economies Review, 29, 31-48. doi:10.1007/s11079-017-9469-5
Milesi-Ferretti, G.-M., & Tille, C. (2011). The Great Retrenchment: International Capital Flows During the Global Financial Crisis. Economic Policy, 26, 289-346. doi:10.1111/j.1468-0327.2011.00263.x
Mishra, P., Moriyama, K., N'Diaye, P. M., & Nguyen, L. (2014). Impact of Fed Tapering Announcements on Emerging Markets. IMF Working Papers, International Monetary Fund.
Omorokunwa, O. G., & Ikponmwosa, N. (2014). Exchange Rate Volatility and Foreign Private Investment in Nigeria. Asian Journal of Business Management, 6, 146-54. doi:10.19026/ajbm.6.5157
Raddatz, C., & Schmukler, S. L. (2012). On the International Transmission of Shocks: Micro-evidence from Mutual Fund Portfolios. Journal of International Economics, 88, 357-74. doi:10.1016/j.jinteco.2012.05.006
Sağlam, M., & Başar, M. (2016). Forecasting Exchange Rate Volatility: The Case of Turkey (in Turkish). KMÜ Sosyal ve Ekonomik Araştırmalar Dergisi, 18, 23-29.
Santis, R. A., & Lührmann, M. (2009). On the Determinants of Net International Portfolio Flows: A Global Perspective. Journal of International Money and Finance, 28, 880-901. doi:10.1016/j.jimonfin.2008.09.002
Tang, X., & Zhou, J. (2013). Nonlinear Relationship between the Real Exchange Rate and Economic Fundamentals: Evidence from China and Korea. Journal of International Money and Finance, 32, 304-23. doi:10.1016/j.jimonfin.2012.04.010
Tudor, C., & Popescu-Dutaa, C. (2012). On the Causal Relationship between Stock Returns and Exchange Rates Changes for 13 Developed and Emerging Markets. Procedia - Social and Behavioral Sciences, 57, 275-82. doi:10.1016/j.sbspro.2012.09.1186
Yıldırım, H. H., & İldokuz, B. (2019). Uncovered Interest Rate Parity and Determining The Financial Factors Which Pull The Portfolio Investment to Turkey During The 2005-2014 (in Turkish). Ekoist: Journal of Econometrics and Statistics, 14(29), 247-68.
Aizenman, J., Binici, M., & Hutchison, M. M. (2014). The Transmission of Federal Reserve Tapering News to Emerging Financial Markets. Working Paper, National Bureau of Economic Research (NBER). doi:10.3386/w19980
An, L., & Wang, J. (2012). Exchange Rate Pass-Through: Evidence Based on Vector Autoregression with Sign Restrictions. Open Economies Review, 23, 359-80. doi:10.1007/s11079-010-9195-8
Ando, A., & Modigliani, F. (1963). The ``Life Cycle'' Hypothesis of Saving: Aggregate Implications and Tests. American Economic Review, 53, 55-84.
Aslan, N., Terzi, N., & Siampan, E. (2009). Relationships between Short Term Capital Flows, Economic Growth and Real Exchange Rate: The Case of Turkey (in Turkish). Finansal Araştırmalar ve Çalışmalar Dergisi, 5, 15-32. doi:10.14784/JFRS.2014104497
Atış, A. G., Erer, D., & Akın, A. (2019). Foreign Exchange Exposure and Its Determinants: The Case of Turkey (in Turkish). Ege Stratejik Araştırmalar Dergisi, 10, 43-54. doi:10.18354/esam.569985
Ayhan, F. (2019). An Empirical Research on the Effects of Short-Term Capital Flows and Real Exchange Rate on Economic Growth for Turkey (in Turkish). Ege Stratejik Araştırmalar Dergisi, 14, 106-18. doi:10.19168/jyasar.513290
Balke, N. S., Ma, J., & Wohard, M. E. (2013). The Contribution of Economic Fundamentals to Movements in Exchange Rates. Journal of International Economics, 90, 1-16. doi:10.1016/j.jinteco.2012.10.003
Bonga-Bonga, L., & Mwamba, M. (2011). The Predictability of Stock Market Returns in South Africa: Parametric vs. Non-parametric Methods. South African Journal of Economics, 79, 301-11. doi:10.1111/j.1813-6982.2011.01280.x
Brooks, R., Edison, H., Kumar, M. S., & Sløk, T. (2004). Exchange Rates and Capital Flows. European Financial Management, 10, 511-33. doi:10.1111/j.1354-7798.2004.00261.x
Calvo, G. A., Leiderman, L., & Reinhart, C. M. (1996). Inflows of Capital to Developing Countries in the 1990s. Journal of Economic Perspectives, 10, 123-39.
Caporale, G. M., Ali, F. M., Spagnolo, F., & Spagnolo, N. (2017). International Portfolio Flows and Exchange Rate Volatility in Emerging Asian Markets. Journal of International Money and Finance, 76, 1-15. doi:10.1016/j.jimonfin.2017.03.002
Cerutti, E., Claessens, S., & Puy, D. (2019). Push Factors and Capital Flows to Emerging Markets: Why Knowing Your Lender Matters More than Fundamentals. Journal of International Economics, 119, 133-49. doi:10.1016/j.jinteco.2019.04.006
Chowdhury, A. R. (1993). Does Exchange Rate Volatility Depress Trade Flows? Evidence from Error-Correction Models. The Review of Economics and Statistics, 75, 700-6. doi:10.2307/2110025
Çiçek, M. (2010). Interest Rates, Foreign Exchange Rates and Stock Prices in Turkey: Price and Volatility Spillover Effects. Ankara Üniversitesi SBF Dergisi, 65, 1-28. doi:10.1501/SBFder0000002170
Clark, J., Converse, N., Coulibaly, B., & Kamin, S. B. (2019). Emerging Market Capital Flows and U.S. Monetary Policy. International Finance. doi:10.1111/infi.12355
Eichengreen, B., & Gupta, P. (2015). Tapering Talk: The Impact of Expectations of Reduced Federal Reserve Security Purchases on Emerging Markets. Emerging Markets Review, 25, 1-15. doi:10.1016/j.ememar.2015.07.002
Enders, W. (2010). Applied Econometric Time Series (3 ed.). John Wiley & Sons.
Erduman, Y., & Kaya, N. (2016). Time Varying Determinants of Bond Flows to Emerging Markets. Central Bank Review, 16, 65-72. doi:10.1016/j.cbrev.2016.05.003
Fernandez-Arias, E. (1996). The New Wave of Private Capital Inflows: Push or Pull? Journal of Development Economics, 48, 389-418. doi:10.1016/0304-3878(95)00041-0
Güler, A. (2017). Modeling Exchange Rate Volatility under Volatile Economic Conditions: A Dynamic Time Series Analysis for Turkey (in Turkish). International Journal of Academic Value Studie, 3, 39-47. doi:10.23929/javs.435
Hamilton, J. D. (1989). A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle. Econometrica, 57, 357-84. doi:10.2307/1912559
Hansen, B. E. (1992). The Likelihood Ratio Test under Nonstandard Conditions: Testing the Markov Switching Model of GNP. Journal of Applied Econometrics, 7, S61--S82. doi:10.1002/jae.3950070506
Hau, H., & Rey, H. (2006). Exchange Rates, Equity Prices, and Capital Flows. The Review of Financial Studies, 19, 273-317. doi:10.1093/rfs/hhj008
Jabeen, M., & Ismail, A. (2016). Exchange Rates and International Portfolio Flows: Evidence from Pakistan.
Kılıçarslan, Z. (2018). Determinants of Exchange Rate Volatility: Empirical Evidence for Turkey. Journal of Economics Finance and Accounting, 5, 204-13. doi:10.17261/Pressacademia.2018.825
Li, S., Haan, J., & Scholtens, B. (2018). Are International Fund Flows Related to Exchange Rate Dynamics? Open Economies Review, 29, 31-48. doi:10.1007/s11079-017-9469-5
Milesi-Ferretti, G.-M., & Tille, C. (2011). The Great Retrenchment: International Capital Flows During the Global Financial Crisis. Economic Policy, 26, 289-346. doi:10.1111/j.1468-0327.2011.00263.x
Mishra, P., Moriyama, K., N'Diaye, P. M., & Nguyen, L. (2014). Impact of Fed Tapering Announcements on Emerging Markets. IMF Working Papers, International Monetary Fund.
Omorokunwa, O. G., & Ikponmwosa, N. (2014). Exchange Rate Volatility and Foreign Private Investment in Nigeria. Asian Journal of Business Management, 6, 146-54. doi:10.19026/ajbm.6.5157
Raddatz, C., & Schmukler, S. L. (2012). On the International Transmission of Shocks: Micro-evidence from Mutual Fund Portfolios. Journal of International Economics, 88, 357-74. doi:10.1016/j.jinteco.2012.05.006
Sağlam, M., & Başar, M. (2016). Forecasting Exchange Rate Volatility: The Case of Turkey (in Turkish). KMÜ Sosyal ve Ekonomik Araştırmalar Dergisi, 18, 23-29.
Santis, R. A., & Lührmann, M. (2009). On the Determinants of Net International Portfolio Flows: A Global Perspective. Journal of International Money and Finance, 28, 880-901. doi:10.1016/j.jimonfin.2008.09.002
Tang, X., & Zhou, J. (2013). Nonlinear Relationship between the Real Exchange Rate and Economic Fundamentals: Evidence from China and Korea. Journal of International Money and Finance, 32, 304-23. doi:10.1016/j.jimonfin.2012.04.010
Tudor, C., & Popescu-Dutaa, C. (2012). On the Causal Relationship between Stock Returns and Exchange Rates Changes for 13 Developed and Emerging Markets. Procedia - Social and Behavioral Sciences, 57, 275-82. doi:10.1016/j.sbspro.2012.09.1186
Yıldırım, H. H., & İldokuz, B. (2019). Uncovered Interest Rate Parity and Determining The Financial Factors Which Pull The Portfolio Investment to Turkey During The 2005-2014 (in Turkish). Ekoist: Journal of Econometrics and Statistics, 14(29), 247-68.