NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Capital Flows and the Behavior of Emerging Market Equity Returns

Geert Bekaert, Campbell R. Harvey

NBER Working Paper No. 6669
Issued in July 1998
NBER Program(s):Asset Pricing, International Finance and Macroeconomics

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.

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Document Object Identifier (DOI): 10.3386/w6669

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