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Article
Publication date: 19 February 2020

Kirti Gupta and Shahid Ahmed

The volatile nature of foreign portfolio flows, especially flows into debt market, has large implications on financial and macroeconomic stability in recipient countries…

Abstract

Purpose

The volatile nature of foreign portfolio flows, especially flows into debt market, has large implications on financial and macroeconomic stability in recipient countries. It is necessary to identify the main drivers of portfolio investments in bond market of developing economies to design effective policies to enhance resilience of the economy and help in managing capital flow volatility. The determinants of foreign portfolio investment to Indian equity market have been examined in literature, but flows to bond market remain unexplored. Thus, the purpose of this paper is to identify the possible determinants of foreign portfolio flows to Indian bond market both in the short and in the long run.

Design/methodology/approach

This study carries out a time series analysis by deploying autoregressive distributed lag (ARDL) approach to cointegration of monthly data of the period from January 2002 to December 2016 for the Indian economy. A mix of pull and push factors has been analysed in this study. Domestic growth, domestic stock market performance, interest rate differential, exchange rate, volatility in exchange rate, stock market returns in other emerging economies, foreign output growth and dummy variables to trace the external developments such as global financial crisis and unconventional monetary policies of advanced economies have been used as explanatory variables.

Findings

The dominant pull factor such as interest rate differential explains the dynamics of flows in Indian bond market. The relationship between capital movements and interest rate differentials is the most accepted paradigm in international finance (Haynes, 1988). Among other domestic factors are stock market performance, volatility in exchange rates and domestic growth rates which are found to be significant drivers of foreign portfolio bond flows to India. The study also confirmed that global conditions could induce a fast outflow of capital from India.

Research limitations/implications

The study concludes that both domestic factors and external factors are equally important in determining the foreign portfolio investments in the Indian debt market.

Practical implications

The empirical analysis conducted in this study suggests that direct and indirect measures can be taken to increase and stabilise foreign investments in the Indian bond market. Direct policy measures refer to those tools which are under the ambit of policymakers. Indirect measures comprise those tools that are not under the direct control of the fiscal and monetary authorities but require coordinated efforts of the government and private sector. In this context, strengthening of not only financial and economic but also administrative institutions will be necessary. Creditworthiness and policy credibility should be improved to address erratic foreign portfolio investment in debt market of India.

Originality/value

This study is an original research study. This study adds to the existing literature and is expected to guide policymakers on the specific aspect of the management of capital flows as it gets affected by changes in monetary and fiscal policies.

Details

Journal of Indian Business Research, vol. 12 no. 4
Type: Research Article
ISSN: 1755-4195

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Article
Publication date: 20 February 2009

Orhan Akisik and Ray Pfeiffer

This paper aims to examine the relation between the proportion of direct investment to US total – direct and portfolioinvestment abroad and their country‐specific…

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3039

Abstract

Purpose

This paper aims to examine the relation between the proportion of direct investment to US total – direct and portfolioinvestment abroad and their country‐specific determinants in developed and developing countries between 1997 and 2005, emphasizing the role of high‐quality accounting standards and corporate governance.

Design/methodology/approach

The study covers 46 developed and emerging market countries that are classified into four groups: Advanced, Asian, Central and Eastern European and Latin American. In order to eliminate the adverse effects of possible outliers in some observations on regression results, fixed effect robust regression (RR) techniques were conducted, in addition to fixed effect ordinary least squares (OLS) estimation using panel data.

Findings

It was found that the proportion of direct investment to US total investment abroad is strongly and negatively related to both high‐quality accounting standards and effective corporate governance, even after controlling for a number of variables found in previous research to be important: inflation, stock market capitalization, per capita gross domestic product, openness of destination countries’ economies and tax rates.

Research limitations/implications

One major problem in international accounting research is the difficulty in obtaining of data. This problem was encountered in this study, too. Therefore, some emerging market countries are necessarily excluded from the sample.

Originality/value

The main focus is the contributions of accounting standards and corporate governance to explaining tradeoffs between US direct and portfolio investment in developed and developing countries. In this sense, this is – to the authors’ knowledge – the first study in this area.

Details

Review of Accounting and Finance, vol. 8 no. 1
Type: Research Article
ISSN: 1475-7702

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Article
Publication date: 29 May 2007

Mazin A.M. Al Janabi

It is the purpose of this article to empirically test the risk parameters for larger foreign‐exchange portfolios and to suggest real‐world policies and procedures for the…

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2570

Abstract

Purpose

It is the purpose of this article to empirically test the risk parameters for larger foreign‐exchange portfolios and to suggest real‐world policies and procedures for the management of market risk with the aid of value at risk (VaR) methodology. The aim of this article is to fill a void in the foreign‐exchange risk management literature and particularly for large portfolios that consist of long and short positions of multi‐currencies of numerous developed and emerging economies.

Design/methodology/approach

In this article, a constructive approach for the management of risk exposure of foreign‐exchange securities is demonstrated, which takes into account proper adjustments for the illiquidity of both long and short trading/investment positions. The approach is based on the renowned concept of VaR along with the innovation of a software tool utilizing matrix‐algebra and other optimization techniques. Real‐world examples and reports of foreign‐exchange risk management are presented for a sample of 40 distinctive countries.

Findings

A number of realistic case studies are achieved with the objective of setting‐up a practical framework for market risk measurement, management and control reports, in addition to the inception of a practical procedure for the calculation of optimum VaR limits structure. The attainment of the risk management techniques is assessed for both long and short proprietary trading and/or active investment positions.

Practical implications

The main contribution of this article is the introduction of a practical risk approach to managing foreign‐exchange exposure in large proprietary trading and active investment portfolios. Key foreign‐exchange risk management methods, rules and procedures that financial entities, regulators and policymakers should consider in setting‐up their foreign‐exchange risk management objectives are examined and adapted to the specific needs of a model of 40 distinctive economies.

Originality/value

Although a substantial literature has examined the statistical and economic meaning of VaR models, this article provides real‐world techniques and optimum asset allocation strategies for large foreign‐exchange portfolios in emerging and developed financial markets. This is with the objective of setting‐up the basis of a methodology/procedure for the measurement, management and control of foreign‐exchange exposures in the day‐to‐day trading and/or asset management operations.

Details

The Journal of Risk Finance, vol. 8 no. 3
Type: Research Article
ISSN: 1526-5943

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Book part
Publication date: 27 September 2011

Gohar G. Stepanyan

Purpose – Examine the role of institutional investors in accelerating the development of capital markets and economies abroad, the determinants of their investment, both…

Abstract

Purpose – Examine the role of institutional investors in accelerating the development of capital markets and economies abroad, the determinants of their investment, both in the domestic and foreign markets, and their importance in promoting good corporate governance practices worldwide and facilitating increased financial integration.

Methodology/approach – Review and synthesize recent academic literature (1970–2011) on the process of international financial integration and the role of foreign institutional investors in the increasingly global financial markets.

Findings – Despite the concern that short-term flow of international capital can be destructive to the emerging and developing market economies, academic evidence on a destabilizing effect of foreign investment activity is limited. Institutional investors’ systematic preference for stocks of large, well-known, globally visible foreign firms can explain the presence of a home bias in international portfolio investment.

Research limitations – Given the breadth of the two literature streams, only representative studies (over 45 published works) are summarized.

Social implications – Regulators of emerging markets should first improve domestic institutions, governance, and macroeconomic fundamentals, and then deregulate domestic financial and capital markets to avoid economic and financial crises in the initial stages of liberalization reforms.

Originality/value of paper – A useful source of information for graduate students, academics, and practitioners on the importance of foreign institutional investors.

Details

Institutional Investors in Global Capital Markets
Type: Book
ISBN: 978-1-78052-243-2

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Article
Publication date: 24 November 2020

Safi Ullah and Muhammad Tahir

The purpose of this study is to examine the effect of country- and firm-specific factors on foreign investment in Pakistan.

Abstract

Purpose

The purpose of this study is to examine the effect of country- and firm-specific factors on foreign investment in Pakistan.

Design/methodology/approach

This study uses time-series data for country-level determinants and uses panel data for 100 listed non-financial companies selected based on market capitalisation from 2005 to 2015.

Findings

Findings suggest that the stock market returns and liquidity of the country significantly positively influence the foreign portfolio investment (FPI) in Pakistan. Whereas, economic growth surprisingly is negatively related to foreign portfolio investment. In addition, findings reveal that firm size, financial leverage, dividend yield and global depositary receipts (GDR) have a positive impact on the total foreign investment at firm level. Further, foreign institutional investors prefer to invest in those firms that are large, pay high dividends and issue GDR. Furthermore, findings suggest that foreign direct investors tend to invest in firms that are financially leveraged and have low capital gain yield.

Practical implications

At the country level, this study recommends that stock market performance, economic growth and foreign reserves of the country should be maintained and improved to attract FPI. At the firm level, this study recommends issuance of global depositary receipts and high dividend payouts for those firms that are interested in institutional investment in Pakistan.

Originality/value

To the best of authors' knowledge, this study is the first that examines the effect of firm-level factors along with country-level factors on foreign investment in Pakistan.

Details

South Asian Journal of Business Studies, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 2398-628X

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Book part
Publication date: 3 May 2016

Benjamin A. T. Graham, Noel P. Johnston and Allison F. Kingsley

Political risk is a complex phenomenon. This complexity has incentivized scholars to take a piecemeal approach to understanding it. Nearly all scholarship has targeted a…

Abstract

Political risk is a complex phenomenon. This complexity has incentivized scholars to take a piecemeal approach to understanding it. Nearly all scholarship has targeted a single type of political risk (expropriation) and, within this risk, a single type of firm (MNCs) and a single type of strategic mechanism through which that risk may be mitigated (entry mode). Yet “political risk” is actually a collection of multiple distinct risks that affect the full spectrum of foreign firms, and these firms vary widely in their capabilities for resisting and evading these risks. We offer a unified theoretical model that can simultaneously analyze: the three main types of political risk (war, expropriation, and transfer restrictions); the universe of private foreign investors (direct investors, portfolio equity investors, portfolio debt investors, and commercial banks); heterogeneity in government constraints; and the three most relevant strategic capabilities (information, exit, and resistance). We leverage the variance among foreign investors to identify effective firm strategies to manage political risk. By employing a simultaneous and unified model of political risk, we also find counterintuitive insights on the way governments trade off between risks and how investors use other investors as risk shields.

Details

Strategy Beyond Markets
Type: Book
ISBN: 978-1-78635-019-0

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Article
Publication date: 1 April 2003

Georgios I. Zekos

Aim of the present monograph is the economic analysis of the role of MNEs regarding globalisation and digital economy and in parallel there is a reference and examination…

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53529

Abstract

Aim of the present monograph is the economic analysis of the role of MNEs regarding globalisation and digital economy and in parallel there is a reference and examination of some legal aspects concerning MNEs, cyberspace and e‐commerce as the means of expression of the digital economy. The whole effort of the author is focused on the examination of various aspects of MNEs and their impact upon globalisation and vice versa and how and if we are moving towards a global digital economy.

Details

Managerial Law, vol. 45 no. 1/2
Type: Research Article
ISSN: 0309-0558

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Article
Publication date: 1 March 2003

M. Kabir Hassan

Summarizes the net capital flows from industrial to developing/transitional countries 1970‐1996 and recent changes in their equity and bond markets; and identifies the…

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1306

Abstract

Summarizes the net capital flows from industrial to developing/transitional countries 1970‐1996 and recent changes in their equity and bond markets; and identifies the factors affecting these portfolio flows and risk/return behaviour in OIC stock markets. Uses monthly stock return data from ten OIC countries to demonstrate that despite their volatility they might offer opportunities for portfolio diversification; and uses cointegration methods to investigate the dynamic relationships between them. Discusses the causes of the Asian currency crisis and its impact on these stock marekts; and considers what trade and development policies OIC countries should adopt to improve their economies.

Details

Managerial Finance, vol. 29 no. 2/3
Type: Research Article
ISSN: 0307-4358

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Article
Publication date: 8 June 2012

Edyta Stepien and Yuli Su

The purpose of this paper is to empirically examine the benefits of international equity portfolios from the viewpoint of Polish investors.

Abstract

Purpose

The purpose of this paper is to empirically examine the benefits of international equity portfolios from the viewpoint of Polish investors.

Design/methodology/approach

Eight national stock markets are included in the sample and three different portfolio forming strategies – Equally‐Weighted Portfolio (EWP), Minimum Variance Portfolio (MVP) and Tangency Portfolio (TP) – are adopted to construct the international diversified portfolios. In order to reveal the impact of currency hedging, the performance of a non‐hedged versus a fully‐hedged strategy is estimated. Finally, for comparison purpose, performances of the international portfolios from US investors' perspective are also examined.

Findings

Using monthly data from 1999 to 2008, the results show that from an ex post basis, an equally‐weighted global portfolio offers risk reduction opportunities for Polish investors and performance improvement potentials for US investors. In addition, US investors seem to fare better leaving their foreign investment unhedged, while Polish investors benefit from currency hedging. However, ex ante analysis reveals that when short‐selling is allowed, TP outperforms other portfolios and the risk‐adjusted portfolio performance could be enhanced by currency hedging.

Originality/value

In summary, the ex post analysis suggests that global portfolio either reduces risk or improves return. Compared to the domestic portfolio, the international portfolio reduces the portfolio risk while maintaining certain level of portfolio return for Polish investors who experience unusual high volatility in domestic market. On the other hand, an international portfolio yields higher portfolio return with similar risk level, as compared to the domestic portfolio, for US investors who suffer losses in the domestic market. A full currency hedging strategy benefits Polish but not US investors. Hedging or not, the risk of the local stock market is the major contributor to the risk of the equally‐weighted portfolio for both Polish and US investors.

Details

Managerial Finance, vol. 38 no. 7
Type: Research Article
ISSN: 0307-4358

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Article
Publication date: 31 January 2020

Friday Osemenshan Anetor

This study aims to examine the relationship between private capital inflows, financial development and economic growth in 28 sub-Saharan African (SSA) countries between…

Abstract

Purpose

This study aims to examine the relationship between private capital inflows, financial development and economic growth in 28 sub-Saharan African (SSA) countries between the periods 1995 and 2017.

Design/methodology/approach

The study used a secondary source of data obtained from the world development indicator (WDI) and used the system generalized method of moments (SGMM) and dynamic panel threshold regression to analyze the data.

Findings

The study found that foreign direct investment has a negative and significant impact on the economic growth of SSA. The study also found that portfolio investment has a positive impact on economic growth but it is statistically insignificant. However, when portfolio investment interacted with financial development, it became positive and statistically significant presupposing that financial development is a necessary condition for portfolio investment to exert impact on economic growth. Further, the study showed that the interaction of foreign direct investment with financial development has a negative and significant effect on economic growth. Finally, the study found the minimum threshold of financial development at 42.66 per cent.

Practical implications

Policymakers in SSA should be cautious and critical in the kind of foreign direct investment they attract as the open door policy to attract all kinds of foreign direct investment would not bring about the desired result. Also, policymakers in the region should develop and implement policies that would deepen and strengthen the financial system to foster the development of the country’s financial sector and accelerate economic growth.

Originality/value

The contribution of the study lies in establishing a minimum threshold of financial development; thus, providing a clear-cut direction for policymakers in SSA countries in their pursuit of financial development and economic growth.

Details

International Journal of Development Issues, vol. 19 no. 1
Type: Research Article
ISSN: 1446-8956

Keywords

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