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Volatility and foreign equity flows: evidence from the Philippines

Author

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  • Joseph J. French
  • Vijay Kumar Vishwakarma

Abstract

Purpose - The purpose of this paper is to dissect the dynamic linkages between foreign equity flows, exchange rates and equity returns in the Philippines. Design/methodology/approach - Using a parsimonious SVARX‐GARCH model and unique daily equity flow data, this research models the relationship between net equity flows, conditional variance of stock returns and conditional variance of exchange rates. Findings - The authors find several noteworthy results, which are unique to this study and several results that confirm existing literature. Much of existing literature on foreign equity flows into emerging economies find that foreign equity investors are trend chasers and equity flows are auto correlated. The authors confirm these finding in the Philippines and document two new and important findings. First, it was found that unexpected increases in foreign equity flows to the Philippines increases the conditional volatility of the Filipino stock market significantly over the next two weeks of trading. The second major finding is that unexpected shocks to foreign equity flows sharply increases the conditional variance of the USD/PHP exchange rate over the next two to three weeks of trading. Practical implications - Taken together, the results indicate that foreign equity investment, while providing many benefits for small open economies such as the Philippines, does in the short run increase the conditional variance of both the equity market and exchange rates. Policy makers must weigh the benefits of increased risk sharing and the potential for lower costs of capital with the short‐run potential for increase swings in asset prices. Originality/value - This paper is one of the only studies of its kind to test the impact of foreign equity flows on the conditional volatility of returns and exchange rates.

Suggested Citation

  • Joseph J. French & Vijay Kumar Vishwakarma, 2013. "Volatility and foreign equity flows: evidence from the Philippines," Studies in Economics and Finance, Emerald Group Publishing Limited, vol. 30(1), pages 4-21, March.
  • Handle: RePEc:eme:sefpps:v:30:y:2013:i:1:p:4-21
    DOI: 10.1108/10867371311300919
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    Citations

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    Cited by:

    1. Ros Zam Zam Sapian & Noor Azryani Auzairy, 2015. "Foreign Equity Flows and Market Return Linkages: Evidence of Malaysian Stock Market," Global Business Review, International Management Institute, vol. 16(5_suppl), pages 1-14, October.
    2. Ferry Syarifuddin, 2020. "The Dynamics Of Foreign Portfolio Investment And Exchange Rate: An Interconnection Approach In Asean," Working Papers WP/08/2020, Bank Indonesia.
    3. Ahmed, Walid M.A., 2017. "The impact of foreign equity flows on market volatility during politically tranquil and turbulent times: The Egyptian experience," Research in International Business and Finance, Elsevier, vol. 40(C), pages 61-77.
    4. Monica Singhania & Neha Saini, 2018. "Determinants of FPI in Developed and Developing Countries," Global Business Review, International Management Institute, vol. 19(1), pages 187-213, February.

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