Foreign portfolio flows may reflect deep changes in the functioning of an emerging market economy and its capital markets. Using a database of monthly net U.S. equity flows, we investigate the relation of these flows to the behavior of equity returns, the structural characteristics of the capital markets, exchange rates, and the strength of the economy. We find that increases in equity flows are associated with a lower cost of capital, higher correlation with world market returns, lower asset concentration, lower inflation, larger market size relative to GDP, more trade, and slightly higher per capita economic growth.
*Published: This paper was subsequently published as Capital Flows and the Behavior of Emerging Market Equity Returns, Geert Bekaert, Campbell R. Harvey, in NBER book Capital Flows and the Emerging Economies: Theory, Evidence, and Controversies (2000)
Bekaert, Geert and Campbell R. Harvey. "Foreign Speculators And Emerging Equity Markets," Journal of Finance, 2000, v55(2,Apr), 565-613.
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