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A Comparative Analysis on International Portfolio Flows to Asian

Stock Markets With a Nonlinear Perspective

Chapter · June 2018

DOI: 10.4018/978-1-5225-6114-9.ch00

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108

Chapter 5
A Comparative Analysis on
International Portfolio Flows
to Asian Stock Markets With
a Nonlinear Perspective
Ayben Koy
Istanbul Commerce University, Turkey

ABSTRACT
After the Asian financial crisis was solved by International Monetary Fund in late
1997, the recovery in Asian economies begun by 1999. Most of the countries affected
by the crisis needed to change their exchange rate policies. This chapter brings
insight on how the international portfolio flows to Asian stock markets are affected
from the shocks on EUR/USD parity. The weekly observations between 01/01/2010
to 21/04/2017 belong to India, Indonesia, Philippine, South Korea, Thailand,
Malaysia, and Vietnam. Use of Markov regime switching vector autoregressive
models presents the relationship according to the different regimes of the markets
in the study. The results indicate that (1) the international portfolio flows through
Asian stock markets are governed by a long run, nonlinear relation; (2) the shocks
on EUR/USD parity have positive effects on the countries’ portfolio flows except
Malaysia; and (3) the responses to the shocks vary according to the market regimes
or according to the countries.

DOI: 10.4018/978-1-5225-6114-9.ch005

Copyright © 2018, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
Comparative Analysis on International Portfolio Flows to Asian Stock Market

INTRODUCTION

Beginning in the summer of 1997, a series of currency declines spread through

Asian markets and were followed with decreasing stock markets. The crisis called
the Asian Financial Crisis or Asian Contagion had been solved by International
Monetary Fund in late 1997. Most of the countries affected from the crisis needed
to change their exchange rate policies (Calvo and Reinhart, 2002). The effect of
the crisis had been seen in the developed markets too. However, the inevitable
transition from the fixed exchange rate policy to the flexible rate policy made the
markets unprotected under fluctuating currencies. This change has also been a part
of international markets’ liberalizations. By the monetary policy of central banks
following the last global crisis and European crisis, which aimed to increase the
economic activity for example in USA the interest rates had reached zero lower
bound and lowered yields on government bonds, caused high liquidity in international
markets, and high portfolio flows to the emerging markets (EMs) were seen. Large
external financing needs and risk premiums of EMs took the attention of international
investors. Moreover, emerging economies, which have a high growth rate compared
to the world average, are attracting these markets in terms of international investors.
After the European Central Bank (ECB) announced the extended asset purchase
programme (EAPP) in 2015, increases in portfolio flows to EMs were expected too
(Georgiadis and Grab, 2015). The Asian countries, which have experienced sharp
currency depreciations, gave an opportunity to -the risk premiums of the international
investors to rise (Sangare, 2016). In particular, the exchange rate, interest rate and
asset returns are the primary factors for portfolio investments which aim to go back
to the home country with high returns. Moreover, recent international finance theory
suggests that exchange rates are influenced by capital flows as much as by current
account balances and long-term interest rates. Because having the highest average
6.5 GDP growth rate (Estimate; 2015=6.8; 2016=6.4; Projection; 2017=6.5. (imf.
org)) above other country groups, the studies on Emerging and Developing Asia
have got an increasing interest among academicians.
In the sample period between 01/01/2010-21/04/2017, USD had got a stronger
appearance not only against EMs’ currencies but also against Euro, too. In most
of the researches, foreign exchange is used as an indicator effecting international
portfolio flows to the countries’ capital markets. Actually, foreign exchange volatility
of a country is an indicator which only affects that country’s variables. The goal of
our study is to provide a comparative evaluation on the relationship between EUR/
USD parity and the international portfolio flows with a nonlinear perspective. The
mutual switching mechanism of the international portfolio flows through Asian
stock markets (India, Indonesia, Philippine, South Korea, Thailand, Malaysia and
Vietnam) between 01/01/2010 to 21/04/2017 is firstly investigated. Secondly, a model

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