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Hot money in disaggregated capital flows

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  • Cheng Yan

Abstract

We explore the possible existence and behavior of hot money in six categories of disaggregated bilateral capital flows (equity inflows, equity outflows, bond inflows, bond outflows, banking credit inflows, and banking credit outflows) for 12 emerging markets vis-à-vis the US from 1995 to 2012 and provides several new findings. First, we identify the existence of hot money in all six categories above and conclude that both gross inflows and gross outflows can be the sources of hot money. Second, hot money in equity inflows (outflows) engages in positive (negative) feedback trading regarding local stock market returns. Third, some categories of hot money have a temporary influence on local stock market returns while the others have a permanent influence, supporting the explanations of both price pressures and information advantage. Finally, local stock market returns in half of our sample countries, which have tightened capital controls during the late 2000s global financial crisis (GFC), are more affected by hot money than in the other half. Our findings confirm several popular conjectures of hot money, and endorse the use of capital controls to limit financial vulnerability in the run-up to and during the GFC.

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  • Cheng Yan, 2018. "Hot money in disaggregated capital flows," The European Journal of Finance, Taylor & Francis Journals, vol. 24(14), pages 1190-1223, September.
    • Handle: RePEc:taf:eurjfi:v:24:y:2018:i:14:p:1190-1223
    DOI: 10.1080/1351847X.2017.1411821
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    References listed on IDEAS

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    Cited by:

    1. António Afonso & José Alves & Krzysztof Beck & Karen Jackson, 2022. "Financial, Institutional, and Macroeconomic Determinants of Cross-Country Portfolio Equity Flows," CESifo Working Paper Series 9872, CESifo.
    2. Tang, Chun & Liu, Xiaoxing & Zhou, Donghai, 2022. "Financial market resilience and financial development: A global perspective," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 80(C).
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    4. Shahrier, Nur Ain & Anwer, Zaheer & Hassan, M. Kabir, 2023. "Do different streams of capital flows affect asset prices differently?," Global Finance Journal, Elsevier, vol. 57(C).
    5. Zhang, Jinhua & Wang, Guipu & Yan, Cheng, 2020. "Can foreign equity funds outperform their benchmarks? New evidence from fund-holding data for China," Economic Modelling, Elsevier, vol. 90(C), pages 11-20.

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