Private Information, Capital Flows, and Exchange Rates

Abstract

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Domestic and multilateral effects of capital controls in emerging markets

“…The observation that capital-control policy matters mostly for gross flows and not for their net movement, but nevertheless affects exchange rates and monetary policy autonomy reflects the possibility that prices can adjust without a change in underlying flows (Rey, 2017;Froot and Ramodarai, 2005). Price changes may take place, for example, due to shifts in expectations, changes in order flows (Gyntelberg et al, 2018;Fan and Lyons, 2003) or alterations in the composition of flows due to portfolio rebalancing (Alpanda and Kabaca, 2015).…”

“…The results are consistent with existing literature: Edwards and Rigobon (2009) find that a tightening of Chile's capital controls led to an increase in unconditional volatility of the exchange rate and attribute this to greater market segmentation of the foreign exchange market. Further, the literature on order flow has shown that foreign investors' transactions in the stock market can have a different impact on exchange rates than their transactions in bond markets (Gyntelberg et al, 2018), and that transactions by different types of foreign investors also affect exchange rate (and therefore its volatility) differently (Fan and Lyons, 2003). By generating order flow from different types of investors and in different markets, capital controls could increase exchange rate volatility, at least temporarily.…”

Portfolio Flows, Global Risk Aversion and Asset Prices in Emerging Markets

“…36 Gyntelberg, et al (2012) finds that capital flows related to stock market transactions have a greater and more lasting impact on the exchange rate than capital flows related to bond market transactions. In line with the order flow literature, they relate this finding to the superior amount of private information conveyed by equity market investors compared to bond market investors.…”

Dynamic Spillover Effects between the US Stock Volatility and China’s Stock Market Crash Risk: A TVP-VAR Approach

“…Barroso et al [26] found that the US unconventional monetary policy affected Brazil's capital inflow, which channeled to exchange rate appreciation, stock market price rise, credit growth, and consumption increase. Gyntelberg et al [27] studied the capital inflow of foreign investors into the stock market had a significant impact on the exchange rate, while the capital inflow into the local government bond market had no impact on the exchange rate. From the above, the RMB exchange rate and short-term capital flow have a great impact on the stock price (return or volatility), so this paper puts them into the model of stock market crash risk.…”