The Dynamics of Emerging Market Equity Flows
Coauthor(s): Campbell Harvey, Robin Lumsdaine.
We study the interrelationship between capital flows, returns, dividend yields and world
interest rates in 20 emerging markets. We estimate a vector autoregression with these variables
to measure the degree to which lower interest rates contribute to increased capital flows and
shocks in flows affect the cost of capital among other dynamic relations. We precede the VAR
analysis by a detailed examination of endogenous break points in capital flows and the other
variables. These structural breaks are traced to the liberalization of emerging equity markets.
Our evidence of structural breaks calls into question past research which estimates VAR models
over the full sample. After a liberalization, we find that equity flows increase by 1.4% of
market capitalization. We also show that shocks in equity flows initially increase returns which
is consistent with a price pressure hypothesis. While the effect is diminished over time, there
also appears to be a permanent impact. This is consistent with our finding that our proxy for
the cost of capital, the dividend yield, decreases. Finally, our analysis of the transition dynamics
from pre-liberalization to post-liberalization suggests that when capital leaves, it leaves
faster than it came in. These results may help us understand the dynamics of the recent crises
in Latin America and East Asia.
Source: Journal of International Money and Finance
Bekaert, Geert, Campbell Harvey, and Robin Lumsdaine. "The Dynamics of Emerging Market Equity Flows." Journal of International Money and Finance 21 (2002): 295-350.