The behavior of stock market prices throughout the episodes of capital inflows

This study aims to investigate the behavior of stock prices throughout the episodes of foreign capital flows using data of daily stock prices and quarterly foreign capital flows from 14 EMEs. To this end, the episodes of capital flows are identified using the threshold and the k-means clustering approaches. Next, the stock index changepoints are detected using the Pruned Exact Linear Time (PELT) method. Finally, we combine the results by distributing the detected changepoints over the identified capital flows. The results reveal that the stock indices have been rarely pushed further during the entire surge episodes identified by both approaches, and thus surges of capital flows do not necessarily lead to further appreciation of stock prices. In the meantime, a significant appreciation of stock prices is observed during the normal state of capital flows. On the other hand, it is noticed that the stock prices have not often depreciated during the episodes of foreign capital outflows in all the selected EMEs, which means that stock prices have been less vulnerable to reversals of foreign capital flows