Paper - Decomposing the Heterogeneity in Portfolio Flows to Emerging Markets

Abstract

This paper offers a perspective on the determinants in bond and equity portfolio flows to eight emerging market economies (EMEs). Using a structural vector autoregressive (SVAR) model, the impact of three global and two domestic shocks on net inflows are assessed in Latin America, South East Asia and South Africa. The results indicate that equity market volatility and monetary policy shocks in the US (measured by the VIX and Federal Reserve Balance Sheet) have been influential in driving flows to these regions. Furthermore, evidence on the heterogeneity in these responses (both inter and intra-regionally), as well as the case for VIX shocks explaining the volatility within these flows throughout the post-Lehman era, is presented. These findings are bound to have implications on investor and policymaking decisions throughout the emerging market context.