The causal effects of equity flows: Evidence from Korea

초록

In this paper, we estimate the causal effects of gross equity inflows into an open economy using the Granular Instrument Variable (GIV) constructed from regulatory data on foreign investments in the Korean stock market. We find that a one-standard-deviation increase in monthly foreign inflows into the Korean stock market results in approximately a 2.2% rise in the Korean benchmark stock price index and a 1.0% appreciation of the Korean won against the US dollar. These foreign inflows also lead to drops in short-term treasury bond rates and improvements in dollar funding conditions. Our empirical results are consistent with the Inelastic Market Hypothesis.

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