Portfolio Equity Flows and Volatility of Stock Returns in Developing Countries

Abstract

This paper investigated the relationship between foreign portfolio equity flows and the volatility of stock market returns in a sample of twenty-nine developing countries. The study finds no systematic relationship between volatility of returns and foreign portfolio equity investments. This means that foreign portfolio investment does not contribute significantly to volatility of returns in emerging markets. The results were not sensitive to geopolitical regions. Thus, policy measures that attempt to reduce capital account volatility by administratively limiting short-term inflows is unlikely to be effective because there is little evidence that these flows really are volatile. Our results reinforces previous study by Claessens et al. (1995). Consequently the fear that stock markets integration will lead to volatile domestic markets may be unfounded on empirical grounds.