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International capital flow in a period of high inflation: The case of China

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  • Liu, Qiming
  • Liu, Zhenya
  • Moussa, Faten
  • Mu, Yuhao

Abstract

This study investigates the behavior of international capital flows by considering northbound capital flows into China’s A-share market—a market where northbound capital is widely viewed as synonymous with “smart money”. However, since the outbreak of COVID-19, the global economy has undergone a period of high inflation and stocks are considered overweight by international investors. We therefore explore whether the predictive power of northbound capital changes during high-inflation periods. Using a threshold regression model, we find that northbound capital only has predictive power when the global inflation level is low. We also explore the relationship between northbound capital and global risk and demonstrate that the weakened predictive power of northbound capital in our sample is independent of high global risk. Thus, overall, this study finds that the role of northbound capital in China’s A-share market is closely related to inflation and to the global economic environment.

Suggested Citation

  • Liu, Qiming & Liu, Zhenya & Moussa, Faten & Mu, Yuhao, 2024. "International capital flow in a period of high inflation: The case of China," Research in International Business and Finance, Elsevier, vol. 67(PB).
    • Handle: RePEc:eee:riibaf:v:67:y:2024:i:pb:s0275531923001964
    DOI: 10.1016/j.ribaf.2023.102070
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    2. Aljohani, Bader M. & Fadul, Abubaker & Asiri, Maram S. & Alkhathami, Abdulrahman D. & Hasan, Fakhrul, 2024. "Volatility transmission in the property market during two inflationary periods: The 2008–2009 global financial crisis and the COVID-19 crisis," Research in International Business and Finance, Elsevier, vol. 70(PB).

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    More about this item

    Keywords

    High inflation; Northbound capital; Autoregressive model; Threshold regression; Leading indicator;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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