International Capital Flows and Extreme Exchange Market Pressure: Evidence from Emerging Market Economies

Sook Rei Tan, Wei-Siang Wang () and Wai-Mun Chia ()
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Wei-Siang Wang: Nanyang Technological University, School of Social Sciences
Wai-Mun Chia: Nanyang Technological University, School of Social Sciences

Open Economies Review, 2021, vol. 32, issue 3, No 2, 479-506

Abstract: Abstract In response to the currency crises in the emerging market economies (EMEs) during the 1990s, earlier studies tended to put emphasis on identifying and explaining currency crash, which is an extreme event mostly associated with massive capital reversals. After the 2008 global financial crisis, the focus shifted towards enormous capital inflows which have put a sharp appreciation pressure on domestic currency and inflated a large housing and construction bubble. In this paper, we examine the foreign exchange instabilities of a group of EMEs between 1995Q1 and 2019Q4 using the exchange market pressure (EMP) index by taking into considerations both extreme positive and negative episodes. The identification of tail observations is carried out under the framework of Extreme Value Theory (EVT) to handle asymmetric and heavy-tailed data. A panel multinomial logit model is used to explore whether the predictors differ between extreme positive and negative EMP events. Our findings show that (1) there is asymmetry in the EMP distributions, where the occurrence of currency crises is more frequent than excessive appreciations in most EMEs, (2) portfolio and credit flows are significant predictors to both extreme events, and (3) by distinguishing the residency of capital flows, foreign credit flow is the key factor that contributes to the devaluation pressure in the EMEs.

Keywords: Exchange market pressure; Extreme value theory; Capital flows; Emerging market economies; Multinomial logit model (search for similar items in EconPapers)
JEL-codes: F15 F21 F31 F32 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1007/s11079-020-09599-y

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