Detecting capital flow surges in developing countries

Abstract

This study investigates excessive movements in capital flows called surges or bonanzas. Contrary to the previous work that extensively uses ad‐hoc measures and discretionary thresholds; we adopt a distinctive methodology to detect capital flow surges based on right‐tailed unit root tests. Generalized supremum augmented Dickey‐Fuller (GSADF) proposed by Phillips et al. (2015) is successfully applied to identify asset price bubbles. Exploiting the technical and conceptual similarities in the formations of asset price bubbles and capital flow surges, we perform the GSADF procedure using quarterly net capital flows data from 43 developing countries. The advantages of this procedure are twofold: it can distinguish the behaviour of volatility and explosiveness and diagnose multiple surges in a series. We identified 727 individual surges, 130 different surge episodes, and 4 global capital flow waves over the periods of 1995–2017. Compared with the existing measures, the application of this surge‐detection technique provides a useful tool as a data‐driven method with no need for discretionary thresholds. We also investigate the factors triggering capital flow surges, employing the Fernandez‐Val and Weidner (2016) bias‐adjusted fixed effects probit model and find that domestic factors play a dominant role on the surge occurrences in developing countries.

Capital‐flow volatility in emerging markets: A panel GARCH approach

“…Further, the model accounts for cross-sectional dependence by parametrizing the covariance equation (Bouras et al, 2019;Valera et al, 2017). 2 As a result, we not only take into account the commonalities and contagion of capital flows documented in the previous literature (Ghosh et al, 2014;Kaya et al, 2020;Lee et al, 2013;Rey, 2015) in analysing the drivers of the volatility of flows, but are also able to investigate the potential factors affecting the comovement of flows. 3 In Section 4, we describe panel data and check if the model suits the data structure by performing some preliminary tests.…”

Financial, Institutional and Macroeconomic Determinants of Cross-Country Portfolio Equity Flows

“…Schularick (2006) show that flows from developed to developing countries were increasingly important in the early 20th century, but this is not the case in the 21st century as capital flows from developed to developing countries flattened out. Capital flows have also been the focus of concern when considering the risks associated with exchange rate fluctuations, capital that moves quickly and frequently (for further discussion on 'hot money' see Yan (2018) and on detecting surges in flows see Kaya et al (2020)) as well as the loss of monetary control (Binici et al, 2010). These issues have led to a literature that explores the determinants of equity flows, where global/external (push) and country-specific (pull) factors are used to categorise the independent variables used in modelling exercises (see Koepke (2019);Levy Yeyati and Zúñiga (2015) for reviews of the equity flows literature).…”