Foreign Investors Under Stress: Evidence from India

By Ila Patnaik, Ajay Shah, Nirvikar Singh

May 22, 2013

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Ila Patnaik, Ajay Shah, and Nirvikar Singh. Foreign Investors Under Stress: Evidence from India, (USA: International Monetary Fund, 2013) accessed December 22, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

Emerging market policy makers have been concerned about the financial stability implications of financial globalization. These concerns are focused on behavior under stressed conditions. Do tail events in the home country trigger off extreme responses by foreign investors – are foreign investors `fair weather friends'? In this, is there asymmetry between the response of foreign investors to very good versus very bad days? Do foreign investors have a major impact on domestic markets through large inflows or outflows – are they ‘big fish in a small pond’? Do extreme events in world markets induce extreme behavior by foreign investors, thus making them vectors of crisis transmission? We propose a modified event study methodology focused on tail events, which yields evidence on these questions. The results, for India, do not suggest that financial globalization has induced instability on the equity market.

Subject: Balance of payments, Capital controls, Emerging and frontier financial markets, Exchange rates, Financial markets, Foreign direct investment, Foreign exchange, Stock markets

Keywords: Capital controls, Emerging and frontier financial markets, Event study, Event study analysis, Event study approach, Event study framework, Event study methodology, Exchange rates, Extreme events, FII flow, Flat event study response, Foreign direct investment, Foreign investor, Foreign investors, Global, Stock markets, WP

Publication Details

Pages:

31
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2013/122
Stock No:

WPIEA2013122
ISBN:

9781484364529
ISSN:

1018-5941

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