Foreign Investment Fluctuations and Emerging Market Stock Returns: The Case of Mexico
Federal Reserve Bank of New York Staff Report No. 24
Posted: 17 May 2000
Date Written: May 1997
We investigate the economically and statistically significant positive correlation between monthly foreign purchases of Mexican stocks and Mexican stock returns. We find that a 1 percent of market capitalization surprise foreign inflow is associated with a 13 percent increase in Mexican stock prices. We explore whether this correlation might be explained by permanent reductions in conditional expected returns resulting from expansion of the investor base along the lines modeled by Merton (1987), or correlations with other factors causing returns, price pressures, or positive feedback strategies by foreign investors, and conclude that the available evidence is consistent with the base-broadening hypothesis.
JEL Classification: F21
Suggested Citation: Suggested Citation