Portfolio flows – exchange rate volatility: is there a puzzling relationship?

Abstract

Purpose

This study investigates possible shock transmission and volatility spillover effects among the exchange rate changes and international portfolio flows for United States vis-à-vis two fast-growing emerging country groups: the BRICS (Brazil, Russia, India, China and South Africa) and MINT (Mexico, Indonesia, Nigeria and Turkey).

Design/methodology/approach

Applying VAR-BEKK-GARCH model, the evidence indicates that exchange rate fluctuations have a negative impact on net equity flows in Brazil, Russia, India and Turkey; thus, supporting the view that exchange rate uncertainty is an important driver of equity home bias.

Findings

As for the comparison of the pre- and post-crisis period, the findings support the evidence that the post-crisis period witnessed a greater number of cases of significant shock and volatility spillovers among exchange rate uncertainty and portfolio flows.

Originality/value

Overall, the empirical results provide fresh insights and policy implications for domestic and international investors through investment activities, and for policymakers through maintaining economic and financial stability.

Citation

Aydoğan, B. and Vardar, G. (2021), "Portfolio flows – exchange rate volatility: is there a puzzling relationship?", Journal of Economic and Administrative Sciences, Vol. 37 No. 4, pp. 611-642. https://doi.org/10.1108/JEAS-02-2020-0021