The Causal Effects of Equity Flows: Evidence from Korea

Jun Hee Kwak (), Bada Han () and Jaeyoung Lee ()
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Jun Hee Kwak: Department of Economics, Sogang University, Seoul, Korea
Bada Han: InternationalMonetary Fund, Strategy, Policy, and Review Department
Jaeyoung Lee: Bank of Korea, Foreign ExchangeMarket Team

No 2307, Working Papers from Nam Duck-Woo Economic Research Institute, Sogang University (Former Research Institute for Market Economy)

Abstract: In this paper,we estimate the causal effects of gross equity inflows into an open economy using the Granular Instrument Variable (GIV) constructed from regulatory data on foreign investments in the Korean stock market. We find that a one-standard-deviation increase in monthly foreign inflows into the Korean stock market results in approximately a 2.2% rise in the Korean benchmark stock price index and a 1.0% appreciation of the Korean won against the US dollar. These foreign inflows also lead to drops in short-term treasury bond rates and improvements in dollar funding conditions. Our empirical results are consistent with the InelasticMarket Hypothesis.

Keywords: Foreign Investor; Capital Flow; Gross Equity Flow; Stock Price; Granular Instrument; InelasticMarket Hypothesis (search for similar items in EconPapers)
JEL-codes: F31 F32 G12 G15 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2023
New Economics Papers: this item is included in nep-fdg and nep-ifn
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Persistent link: https://EconPapers.repec.org/RePEc:sgo:wpaper:2307

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