Foreign investors under stress: Evidence at the firm level
Data using a modified event study methodology focused on tail events.
Emerging market policy makers have been concerned about the financial stability implications of financial globalization. These concerns are focused particularly on behavior under stressed conditions. Do tail events in the home country trigger off extreme responses by foreign investors and is there any asymmetry between the responses of foreign investors to very good versus very bad days? Do foreign investors have a major impact on domestic markets through large movements of funds? Do extreme events in world markets induce extreme behavior by foreign investors, thus making them vectors of crisis transmission? We examine these questions for India, using a modified event study methodology focused on tail events. We analyze data for individual companies, and find that, while in some cases, foreign investors do exacerbate extreme movements in stock price returns, in other cases they seem to lean against the wind, potentially stabilizing prices. Hence, there is no clear evidence for the presumption that foreign portfolio investors exhibit herd behavior that is uniformly destabilizing.
An R package for conducting event studies and a platform for methodological research on event studies.