Portfolio Flows - Exchange Rate Volatility: Is There a Puzzling Relationship?

Abstract

Purpose This study investigates possible shock transmission and volatility spillover effects among the exchange rate changes and international portfolio flows for United States vis-a-vis two fast-growing emerging country groups: the BRICS (Brazil, Russia, India, China and South Africa) and MINT (Mexico, Indonesia, Nigeria and Turkey). Design/methodology/approach Applying VAR-BEKK-GARCH model, the evidence indicates that exchange rate fluctuations have a negative impact on net equity flows in Brazil, Russia, India and Turkey; thus, supporting the view that exchange rate uncertainty is an important driver of equity home bias. Findings As for the comparison of the pre- and post-crisis period, the findings support the evidence that the post-crisis period witnessed a greater number of cases of significant shock and volatility spillovers among exchange rate uncertainty and portfolio flows. Originality/value Overall, the empirical results provide fresh insights and policy implications for domestic and international investors through investment activities, and for policymakers through maintaining economic and financial stability.