Do Foreign Portfolio Flows Increase Risk in Emerging Stock Markets? Evidence from Six Latin American Countries 1999-2008

38 Pages Posted: 1 Oct 2014

See all articles by Diego A. Agudelo

Diego A. Agudelo

Universidad EAFIT - School of Economics and Finance - Center for Research in Economic & Finance (CIEF); Universidad EAFIT

Milena Castaño

Independent

Date Written: December 15, 2012

Abstract

Foreign portfolio flows have been blamed for causing instability in emerging markets, especially during financial crises. This study measured the effect of foreign capital flows on volatility and exposure to world market risk in the six largest Latin American stock markets: Argentina, Brazil, Colombia, Chile, Mexico and Peru, for around 10 years including the 2008’s World financial crisis. This will test whether these flows cause instability for those markets and increase their exposure to international stock market returns. A proprietary database, from Emerging Portoflio.com and time series models, both univariate (ARCH-GARCH) and multivariate (VAR), are used to estimate the effect foreign portfolio flows on the risk variables and the causality of these effects. We found no strong evidence to support the hypothesis that foreign flows cause instability in the Latin American stock markets, in spite of some evidence of causing price pressure. Instead, the evidence points to a strong dependence of market returns on international stock and foreign exchange markets, both in means and in volatility, instrumental to transmit crisis to those markets.

Keywords: Foreign portfolio flows, Emerging Markets, market risk, ARCH-GARCH, VAR

JEL Classification: F32, G01, G15

Suggested Citation

Agudelo, Diego A. and Castaño, Milena, Do Foreign Portfolio Flows Increase Risk in Emerging Stock Markets? Evidence from Six Latin American Countries 1999-2008 (December 15, 2012). Center for Research in Economics and Finance (CIEF), Working Papers, No. 11-19, Available at SSRN: https://ssrn.com/abstract=2503134 or http://dx.doi.org/10.2139/ssrn.2503134

Diego A. Agudelo (Contact Author)

Universidad EAFIT - School of Economics and Finance - Center for Research in Economic & Finance (CIEF) ( email )

Carrera 49 No. 7 South - 50
Bogotá
Colombia

Universidad EAFIT ( email )

Carrera 49 N° 7 sur – 50
Bogotá, Antioquia 00000
Colombia

Milena Castaño

Independent ( email )

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