International portfolio flows and exchange rate volatility in emerging Asian markets

Abstract

© 2017 The Author(s). This paper investigates the e¤ects of equity and bond portfolio in ows on exchange rate volatility using monthly bilateral data for the US vis-a-vis seven Asian developing and emerging countries (India, Indonesia, Pakistan, the Philippines, South Korea, Taiwan and Thailand) over the period 1993:01-2015:11. GARCH models and Markov switching speci cations with time-varying transition probabilities are estimated in addition to a benchmark linear model. The evidence suggests that high (low) exchange rate volatility is associated with equity (bond) in ows from the Asian countries toward the US in all cases, with the exception of the Philippines. Therefore, capital controls could be an e¤ective tool to stabilise the foreign exchange market in countries where ows a¤ect exchange rate volatility.