International fund flows: surges, sudden stops, and cyclicality

Suxiao Li

Research output: ThesisThesis fully internal (DIV)

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Abstract

International fund flows are cross-border investments in domestic equity and bond markets by global investment funds. They have increased dramatically since the 1990s and played an increasingly important role in the transmission of shocks. In this thesis, we examine the drivers of large changes in fund flows (surges and sudden stops) and the dynamic relationship between fund flows and equity returns, exchange rates, and business cycles of the receiving countries. First, we focus on exceptionally large fund inflows: surges. We find that the occurrence of fund flow surges is dominated by global (push) factors, whereas the magnitude of fund flow surges primarily depends on domestic (pull) factors. Second, we concentrate on another risk related to fund flows: sudden stops, i.e. an abrupt and major reduction in capital inflows to a country that has been receiving large volumes of foreign capital. Different from surges, both push and pull factors are important in explaining the occurrence of sudden stops in fund flows, while the magnitude of sudden stops is primarily driven by global factors. Surges will deteriorate the economic fundamentals of the receiving country and increase the likelihood of sudden stops in fund flows. Capital controls are not helpful to control fund flow surges as well as sudden stops. Third, three methods are employed to examine the cyclicality of fund flows. The results suggest that fund flows tend to be pro-cyclical ahead of business cycle and counter-cyclical contemporaneously. One possible explanation for this phenomenon is that fund flows tend to be positively related with domestic stock returns and domestic stock returns are leading indicators of real economic activities. Finally, we investigate the dynamic interactions between international fund flows, equity returns and exchange rates. We find that large equity fund inflows will increase the demand for domestic currencies and equities, and therefore increase their relative prices. Financial markets in emerging countries have smaller scale and tend to be less developed than industrial countries, which makes them more susceptible to the volatility of international fund flows.
Original languageEnglish
QualificationDoctor of Philosophy
Awarding Institution
  • University of Groningen
Supervisors/Advisors
  • de Haan, Jakob, Supervisor
  • Scholtens, Bert, Supervisor
Award date13-Feb-2017
Place of Publication[Groningen]
Publisher
Print ISBNs978-90-367-9053-6
Electronic ISBNs978-90-367-9052-9
Publication statusPublished - 2017

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