THE DYNAMIC INTERACTION BETWEEN FOREIGN EQUITY FLOWS AND RETURNS: EVIDENCE FROM THE JOHANNESBURG STOCK EXCHANGE

This research examines the dynamic relationship between foreign portfolio equity flows and equity returns on the Johannesburg Stock Exchange (JSE). The primary objective of this research is to uncover how equity market returns influence foreign cross border portfolio equity flows and in turn how those portfolio flows affect equity returns. To understand the linkages between equity flows and market returns, the current research employs vector autoregressive models and presents the results of variance decompositions, impulse response functions and causality tests. The results show that foreign equity flows are ‘pulled’ into South Africa by high returns on the JSE. This finding is consistent with a broad literature on other emerging markets. This research also finds causal link between net equity flows and returns, indicating that the evolution of the JSE is independent of foreign portfolio activity.