Date of Award

Summer 2024

Degree Type

Restricted to Claremont Colleges Dissertation

Degree Name

Economics, PhD

Program

School of Social Science, Politics, and Evaluation

Advisor/Supervisor/Committee Chair

Thomas D. Willett

Dissertation or Thesis Committee Member

Graham Bird

Dissertation or Thesis Committee Member

Levan Efremidze

Dissertation or Thesis Committee Member

Ozan Sula

Terms of Use & License Information

Terms of Use for work posted in Scholarship@Claremont.

Rights Information

© 2024 Anna Terzyan

Keywords

Capital Inflows, Capital Surges, Emerging Markets, International Financial Markets, Stock Price Booms, Stock Prices

Subject Categories

Economics

Abstract

Globalization and the trend toward financial liberalization have made emerging economies attractive to foreign capital inflows. Along with the benefits have been costs. At times, excessive capital inflows have led to domestic credit booms and asset price bubbles. There is little doubt that on average, capital inflow surges are likely to increase stock prices. But if these effects are mild, then they are unlikely to prove disruptive. Of much greater concern is when capital flow surges generate subsequent credit booms and stock market bubbles that raise the risks of future crises and capital flow reversals. While policymakers and academics often associate large capital inflows with booms in asset prices, empirical evidence of this association’s strength is still limited in emerging countries. I find that the relationship between capital inflow surges and stock price booms is weaker than many have assumed. This dissertation provides an empirical assessment of the dynamic interconnection between capital flow surges and asset price booms in emerging economies. This dissertation examines the strength of these links for a sample of 21 MSCI emerging market economies between 1990 and 2018. I find that the relationship is much weaker than is frequently assumed. Of course, stock market booms are likely to contribute to capital inflows as well as the inflows contribute to booms, but any such reverse causality leads to biasing upwards the effects of autonomous capital flow surges. Thus, my estimates provide an upper bound of the strength of the effects of the surges and the relationship is still weak. I started by creating a database of capital inflow surges and stock price booms using various detection methods where an episode is identified as an extreme event (surge or boom) when it exceeds a certain threshold defined by the data in each period. One difficulty in investigating this type of question is that there have been considerable differences in the measures of capital flow surges and stock market booms that have been used in the literature. While there is general agreement on the concept that capital flow surges are unusually large, capital inflows and stock price booms are unusually large rapid growth in stock prices. Therefore, there is no general agreement on how to measure surges/booms and several different methods have been used in the literature. To alleviate this issue, I use a total of nine stock price boom methods and six total gross inflow surge methods based upon several data-driven approaches cited in the literature. This dissertation investigates whether stock price returns and capital inflows are fundamentally different during boom and surge episodes than non-boom or non-surge periods by testing whether there is a difference in each variable’s behavior during the during boom/surge episodes. I conducted non-parametric analysis to test the proportion of surges that are associated with stock price boom and conversely the proportion of booms that are associated with surges. To test this, I created a database of surge boom episode overlaps. I completed this process in two ways. First, when calculating the proportion of surges associated with booms, I use quarterly surge dates and stock price boom start dates. I discuss that there are different channels through which different types of capital flows are likely to affect stock prices. Some would operate more quickly than others. Thus, I consider a window of several quarters for possible relationships. Again, if anything this will yield an upward bias to the estimates of the proportion of surges that lead to stock price booms. If a stock price boom began at any point during a surge episode or/at most two quarters after the surge ends. There may be important differences in a boom starting within two quarters after the surge start versus a boom starting at any point during a surge. If booms start immediately after the surge, direct channels of capital flows into equity markets are stronger. As noted above the appropriate length will also depend on the channels. The direct impact of equity flows should be immediate but could also have delayed effects if increases contribute to expectations of further increases. Bank flow channels should take longer since it would operate largely through credit expansion and increasing stock prices, and credit expansion is likely to occur over a longer period. The associations varied considerably by types of surge and boom measures used, but all were much weaker than has been assumed by many economists and policy officials. I found that surge proportions associated with booms tend to vary by surge and boom type; the maximum is 26.7%, the minimum is 2.5%, and the overall average is 19%. I also investigated the proportions of overlap by year, decade, and country. These often varied considerably and will allow us to undertake further research to gain better knowledge of the factors that influence the strength of these linkages across countries and time.

ISBN

9798383703410

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