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Exchange rate uncertainty and international portfolio flows: a multivariate GARCH-in-mean approach
journal contribution
posted on 2023-06-09, 09:07 authored by Guglielmo Maria Caporale, Faek Menla AliFaek Menla Ali, Nicola SpagnoloThis paper examines the impact of exchange rate uncertainty on different components of net portfolio flows, namely net equity and net bond flows, as well as their dynamic linkages. Specifically, a bivariate VAR GARCH-BEKK-in-mean model is estimated using bilateral monthly data for the US vis-Ã -vis Australia, Canada, the euro area, Japan, Sweden, and the UK over the period 1988:01-2011:12. The results indicate that the effect of exchange rate uncertainty on net equity flows is negative in the euro area, the UK and Sweden, and positive in Australia. The impact on net bond flows is also negative in all countries except Canada, where it is positive. Under the assumption of risk aversion, the findings suggest that exchange rate uncertainty induces a home bias and causes investors to reduce their financial activities to maximise returns and minimise exposure to uncertainty, this effect being stronger in the UK, the euro area and Sweden compared to Canada, Australia and Japan. Overall, the results indicate that exchange rate or credit controls on these flows can be used as a policy tool in countries with strong uncertainty effects to pursue economic and financial stability.
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Publication status
- Published
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- Published version
Journal
Journal of International Money and FinanceISSN
0261-5606Publisher
ElsevierExternal DOI
Volume
54Page range
70-92Department affiliated with
- Business and Management Publications
Full text available
- Yes
Peer reviewed?
- Yes
Legacy Posted Date
2017-12-07First Open Access (FOA) Date
2017-12-07First Compliant Deposit (FCD) Date
2017-12-07Usage metrics
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