Foreign Equity Flows and the Asian Financial Crisis

The paper provides a new perspective on the roles of foreign equity flows in the Asian financial crises of the past two years. It desegregates foreign equity flows to Asian emerging markets over the past several years by type of equity investment and by type of investor, showing that foreign equity investments do not all behave alike. Specifically, the paper distinguishes between three types of foreign investors--mutual funds, pension funds, and hedge funds--and three means by which foreign institutions invest in local stocks--local market investments, international placements and private equity. The paper conclude that international placements and private equity investments were stable sources of finance during the Asian crises. With regard to local equity investments the paper provides a variety of evidence pointing to the conclusion that foreign investors may not have destabilized Asian stock prices: foreign investors in local markets are shown to have investment horizons that are longer than those of domestic investors, to be motivated economic fundamentals, and to have in general suffered significant losses during the crises. The paper however also presents evidence of high influence on local stock markets by foreign investors. Foreign investors are shown to have controlled the majority of free float of most Asian stock markets. Analytical work also shows that foreign investors are market leaders. Hedge funds are found to have gained significantly during the Asian financial crisis. These evidence argue strongly for the development of a domestic capital markets and domestic institutional investor base