Essays on the various aspects of portfolio flow in emerging markets

Abstract

The portfolio investment in emerging markets is two-sided. Increasing financial globalization in emerging market economies has helped to attract a large amount of non-resident portfolio flows, providing local economic agents with risk-sharing and external financing opportunities. However, greater exposure to foreign investments has made local financial markets more vulnerable to external and global shocks. Hence, policymakers in emerging countries should consider the diverse characteristics of portfolio flow to promote foreign investment while minimizing financial risks. In this paper, I examine some aspects of portfolio flows in emerging markets, which provide useful policy implications. In the first chapter, I examine the herd behavior of the equity fund movement of small investors in emerging markets. By analyzing the international equity fund investment of fund managers in 20 emerging markets from 2003 to 2018, I find that a few large global investors dominate the equity fund markets and the movement of small investors' equity funds shows herding. To show evidence of herding, I use a panel regression model which improves the conventional method. I observe the relationship of equity fund investments between large and small investors in emerging markets and conclude that small investors tend to imitate the previous behavior of large investors, leading to herd behavior. Also, this tendency is shown stronger particularly on extreme flows of small investors. In the second chapter, I analyze the effect of tightening macroprudential policies on the volatility of investors' equity flows in emerging markets. To analyze the policy effect in an accurate and robust manner, I apply the double machine learning method with an investor-level dataset, mitigating problems such as reverse causality and omitted variable bias. As a consequence, it is shown that macroprudential policies contribute to stabilizing the fluctuation of equity flows in emerging markets. Particularly, I find that the smoothing effect of macroprudential policies is due to the dampening of the volatility on extreme flows. Moreover, tightening macroprudential policies are proven to be effective where they are less frequently used. In the last chapter, I establish the sequential move model with strategic complementarities, in which a large investor moves first, followed by a continuum of small investors. Given these assumptions, small investors tend to follow the large investor's behavior, leading to herding. And the level of herding becomes higher as the dominance of the large investor increases.