THE DYNAMICS OF FOREIGN PORTFOLIO INVESTMENT AND EXCHANGE RATE: AN INTERCONNECTION APPROACH IN ASEAN

Ferry Syarifuddin (ferry.s@bi.go.id)

No WP/08/2020, Working Papers from Bank Indonesia

Abstract: This paper examines the spatial dependence of foreign portfolio investment (FPI) inflows between ASEAN countries from 2002Q1-2018Q4 utilizing the spatial econometric approach. In particular, to enrich the resultsof our research we also review the relationship between exchange rates and macroeconomic factors on the FPI in Indonesia. The empirical results show that there is a competitive relationship in FPI between ASEAN countries that indicates crowding out of FPI in the host country is most likely to occur when third-country experiences crowding in its FPI inflow. We also show that the exchange rate dynamics in the host and third country do not significantly affect FPI in the host country. Furthermore, the results indicate that interest rate differential, inflation, economic growth, and government debt rating in host countries, also inflation, economic growth, and government debt rating in neighboring countries are responsible for the inflow of FPI into host countries in ASEAN. In the Indonesia case study, our empirical results show that exchange rates affect bond and equity inflows, and also exchange rate volatility affects foreign equity markets and total portfolio inflows inIndonesia. In addition, we find the importance of interest rate differential and the VIX index for Indonesia's portfolios market

Keywords: foreign portfolio investment; exchange rates; macroeconomics; spatial panel econometrics; spillover effects (search for similar items in EconPapers)
JEL-codes: C21 F21 F31 F41 R12 (search for similar items in EconPapers)
Pages: 55 pages
Date: 2020
New Economics Papers: this item is included in nep-fdg, nep-opm and nep-sea
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