The Dynamics of Foreign Portfolio Investment and Exchange Rates: An Interconnection Approach in ASEAN

Abstract

This paper examines the spatial dependence of foreign portfolio investment (FPI) inflows among ASEAN countries in 2002Q1-2018Q4 utilizing the spatial econometric approach. This paper adds clarity to the identification of the true nature of portfolio investment performances. I show a competitive relationship among ASEAN countries, indicating crowding out of FPI in the host country is most likely to occur when the neighboring country is experiencing a crowding out. I also show that exchange rate volatility and changes, both in the host country and neighboring country, do not significantly affect FPI in the host country. Furthermore, I find that, aside from macroeconomic factors of the host country, foreign investors also consider the macroeconomic conditions in the neighboring country, suggesting the existence of spatial dependency. Robustness checks are conducted to confirm the main findings of this study.

Keywords: Foreign Portfolio Investments, Exchange Rates, Spatial Panel Econometrics, Spillover Effects

Yabancı Portföy Yatırımları ve Döviz Kurları Arasındaki Dinamikler: ASEAN Ülkeleri Arasında Bağlantılı Bir Yaklaşım

Özet

Bu makale, ASEAN ülkeleri (Güneydoğu Asya Ülkeleri Birliği) arasındaki yabancı portföy yatırımı (FPI) akımlarının mekansal bağımlılığını 2002Q1-2018Q4 dönemi için mekansal ekonometri yaklaşımı kullanarak incelemektedir. Bu makale, portföy yatırımı performanslarının gerçek yüzünün daha açık tanımlanmasına katkı sağlamaktadır. ASEAN ülkeleri arasında bir rekabet ilişkisi bulunduğunu gösteriyorum, ki bu rekabet şu anlama gelir, komşu ülkede bir kalabalıklaştırarak kovulma etkisi sözkonusu olmuşsa büyük ihtimalle evsahibi ülkedeki yabancı portföy yatırımları da kalabalıklaştırarak kovulma etkisine tabii olacaktır. İlaveten, gerek evsahibi ülkedeki gerekse komşu ülkedeki döviz kuru oynaklığının ve değişimlerinin, evsahibi ülkedeki yabancı portföy yatırımlarını önemli bir ölçüde etkilemediğini gösteriyorum. Ayrıca, yabancı yatırımcıların, evsahibi ülkedeki makroekonomik etkenlerin yanısıra, komşu ülkedeki makroekonomik şartları da gözönüne almakta olduklarını saptadım, bu da bir mekansal bağımlılık ilişkisinin mevcut olduğuna işaret eder. Bu çalışmanın temel bulgularının doğruluğunu belirlemek üzere ekonometrik sağlamlık kontrolleri yapılmışır.

Anahtar kelimeler: Yabancı Portföy Yatırımları, Döviz Kurları, Mekansal Panel Veri Ekonometri, Yayılma Etkileri

Dr. Ferry Syarifuddin (Bank Indonesia, Jakarta, Indonesia)
0000-0002-8172-8276  ferry.s@bi.go.id

Submitted on: 2022-04-18 Accepted on: 2022-07-08

Year:2022 - Volume:1 Issue:2 Pages: 1-12

DOI: https://doi.org/10.36880/J01.2.0113

Download as PDF

APA style citation: Syarifuddin, F. (2022). The Dynamics of Foreign Portfolio Investment and Exchange Rates: An Interconnection Approach in ASEAN. Journal of Eurasian Economies, 1(2), 1-12.

References

• Ahmed, S., & Zlate, A. (2014). Capital flows to emerging market economies: A brave new world? Journal of International Money and Finance, 48(PB), 221–248. https://doi.org/10.1016/j.jimonfin.2014.05.015
• Al-Smadi, M. O. (2018). Determinants of foreign portfolio investment: The case of Jordan. Investment Management and Financial Innovations, 15(1), 328–336. https://doi.org/10.21511/imfi.15(1).2018.27
• Alam, A., Arshad, M. U., & Rajput, W. (2013). Relationship of Labor Productivity, Foreign Direct Investment and Economic Growth: Evidence from OECD Countries. Journal of Business and Management Sciences, 1(6), 133–138. https://doi.org/10.12691/jbms-1-6-3
• Alwafi, Y. M. (2017). Trade Openness, Foreign Direct Investment and Infrastructure Spending : A Comparative Analysis of Their Common Role in the Economic Development Between Selected Developed and Developing Economies.
• Anggitawati, D., & Ekaputra, I. A. (2018). Foreign Portfolio Investment Flows and Exchange Rate: Evidence in Indonesia. Emerging Markets Finance and Trade, 56(2), 260–274. https://doi.org/10.1080/1540496X.2018.1496419
• Baek, I. M. (2006). Portfolio investment flows to Asia and Latin America: Pull, push or market sentiment? Journal of Asian Economics, 17(2), 363–373. https://doi.org/10.1016/j.asieco.2006.02.007
• Bhasin, N., & Khandelwal, V. (2019). Relationship between Foreign Institutional Investment, Exchange Rate and Foreign Exchange Reserves: The Case of India using ARDL Bounds Testing Approach. GIS Business, 10(1), 33–39. https://doi.org/10.26643/gis.v10i1.3720
• Bleaney, M., & Greenaway, D. (2001). The impact of terms of trade and real exchange rate volatility on investment and growth in sub-Saharan Africa. 65, 491–500.
• Chuang, H., & Karamatov, N. (2018). How international financial flows affect stock markets? Applied Economics Letters, 25(21), 1535–1546. https://doi.org/10.1080/13504851.2018.1430325
• Coval, J. D., & Moskowitz, T. J. (2016). The Geography of Investment: Informed Trading and Asset Prices. Journal of Political Economy, 109(4).
• Diebold, F. X. (1988). Empirical Modeling of Exchange Rate Dynamics (Vol. 143). Springer-Verlag Berlin Heidelberg. https://doi.org/10.1007/978-3-642-45641-1
• Elhorst, J. P. (2010). Handbook of Applied Spatial Analysis. In Handbook of Applied Spatial Analysis. https://doi.org/10.1007/978-3-642-03647-7
• Fratzscher, M. (2012). Capital flows, push versus pull factors and the global financial crisis. Journal of International Economics, 88(2), 341–356. https://doi.org/10.1016/j.jinteco.2012.05.003
• Garg, R., & Dua, P. (2014). Foreign Portfolio Investment Flows to India: Determinants and Analysis. World Development, 59, 16–28. https://doi.org/10.1016/j.worlddev.2014.01.030
• Ghosh, A. R., Qureshi, M. S., Kim, J. Il, & Zalduendo, J. (2014). Surges. Journal of International Economics, 92(2), 266–285. https://doi.org/10.1016/j.jinteco.2013.12.007
• Haider, M. A., Asif Khan, M., & Abdulahi, E. (2016). Determinants of Foreign Portfolio Investment and Its Effects on China. International Journal of Economics and Finance, 8(12), 143. https://doi.org/10.5539/ijef.v8n12p143
• Hannan, S. A. (2017). The Drivers of Capital Flows in Emerging Markets Post Global Financial Crisis. IMF Working Papers, 17(52), 1. https://doi.org/10.5089/9781475586121.001
• Jing, Z., Elhorst, J. P., Jacobs, J. P. A. M., & Haan, J. De. (2017). The propagation of financial turbulence : interdependence , spillovers , and direct and indirect effects. Empirical Economics. https://doi.org/10.1007/s00181-017-1249-y
• Jory, S. R., Mishra, T., & Ngo, T. N. (2018). Location-specific stock market indices : an exploration. The European Journal of Finance, 1–33. https://doi.org/10.1080/1351847X.2018.1515095
• Kelejian, H. H., & Prucha, I. R. (2010). Specification and estimation of spatial autoregressive models with autoregressive and heteroskedastic disturbances. Journal of Econometrics, 157(1), 53–67. https://doi.org/10.1016/j.jeconom.2009.10.025
• Kinda, T. (2010). Increasing private capital flows to developing countries: The role of physical and financial infrastructure in 58 countries, 1970-2003. Applied Econometrics and International Development, 10(2), 57–72.
• LeSage, J., & Pace, R. K. (2009). Introduction to Spatial Econometrics. In N. Balakrishnan & W. R. Schucany (Eds.), Introduction to Spatial Econometrics. Taylor & Francis Group, LLC.
• Luitel, P., & Vanpée, R. (2018). How do sovereign credit ratings help to financially develop low-developed countries ? (Issue 8).
• Ndou, E., Gumata, N., & Ncube, M. (2017). Global Economic Uncertainties and Exchange Rate Shock. Palgrave Macmillan.
• Ouedraogo, R. (2017). Portfolio Inflows and Real Effective Exchange Rates: Does the Sectorization Matter? IMF Working Papers, 17(121), 1. https://doi.org/10.5089/9781484301135.001
• Persson, T., & Svensson, L. E. O. (1989). Exchange rate variability and asset trade. Journal of Monetary Economics, 23(3), 485–509. https://doi.org/10.1016/0304-3932(89)90043-3
• Qureshi, M. S., Ghosh, A. R., Zalduendo, J., & Kim, J. Il. (2012). Surges. IMF Working Papers, 12(22), 1. https://doi.org/10.5089/9781463931841.001
• Rafi, O. P. C. M., & Ramachandran, M. (2018). Capital flows and exchange rate volatility: experience of emerging economies. Indian Economic Review, 53(1–2), 183–205. https://doi.org/10.1007/s41775-018-0031-1
• Rai, K., & BHANUMURTHY, N. R. (2004). Determinants Of Foreign Institutional Investment In India: The Role Of Return, Risk, And Inflation. The Developing Economies, 42(4), 479–493. https://doi.org/10.1111/j.1746-1049.2004.tb00246.x
• Regelink, M., & Paul Elhorst, J. (2015). The spatial econometrics of FDI and third country effects. Letters in Spatial and Resource Sciences, 8(1). https://doi.org/10.1007/s12076-014-0125-z
• Singhania, M., & Saini, N. (2018). Determinants of FPI in Developed and Developing Countries. Global Business Review, 19(1), 187–213. https://doi.org/10.1177/0972150917713280
• Srinivasan, P., & Kalaivani, M. (2015). Determinants of Foreign Institutional Investment in India: An Empirical Analysis. Global Business Review, 16(3), 364–376. https://doi.org/10.1177/0972150915569925
• Vardhan, H., & Sinha, P. (2016). Influence of Foreign Institutional Investments (FIIs) on the Indian Stock Market: An Insight by VAR Models. Journal of Emerging Market Finance, 15(1), 49–83. https://doi.org/10.1177/0972652715623677
• Verma, R., & Prakash, A. (2011). Sensitivity of Capital Flows to Interest Rate Differentials : An Empirical Assessment for India. May, 1–42.
• Waqas, Y., Hashmi, S. H., & Nazir, M. I. (2015). Macroeconomic factors and foreign portfolio investment volatility: A case of South Asian countries. Future Business Journal, 1(1–2), 65–74. https://doi.org/10.1016/j.fbj.2015.11.002
• Wong, H. T. (2017). Real exchange rate returns and real stock price returns. International Review of Economics and Finance, 49(16), 340–352. https://doi.org/10.1016/j.iref.2017.02.004
• Yu, L., Wang, S., & Lai, K. K. (2007). Foreign-exchange-rate forecasting with artificial neural networks