Cross-border capital flows and information spillovers across the equity and currency markets in emerging economies

Deven Bathia, Riza Demirer, Román Ferrer and Ibrahim D. Raheem

Journal of International Money and Finance, 2023, vol. 139, issue C

Abstract: This paper presents a novel perspective on the interaction between equity and currency markets in emerging market economies (EMEs) by (i) examining the nonlinear effects of capital flows on return spillovers between the stock and currency markets in a sample of twelve EMEs via quantile causality tests that capture the quantile specific interactions, and (ii) providing a comparative analysis of the influence of debt versus equity flows over the spillover patterns. We show that the causal effects of international debt and equity flow on return spillovers across the equity and FX markets are largely concentrated at lower quantiles, suggesting that the arrival of information via capital flows tends to ease shock transmissions across these markets. At the same time, international flows are found to facilitate the propagation of shocks in the direction of the currency market from the equity market, in line with the portfolio rebalancing hypothesis wherein equity market fluctuations lead to a subsequent correction in the currency market. The findings have important implications for investors and policymakers regarding the role of international capital flows as a facilitator of informational spillovers in emerging equity and currency markets.

Keywords: Capital flows; Emerging markets; Connectedness; Quantile causality (search for similar items in EconPapers)
JEL-codes: C22 F30 G15 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:139:y:2023:i:c:s0261560623001493

DOI: 10.1016/j.jimonfin.2023.102948

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