Importance of Foreign Ownership and Staggered Adjustment of Capital Outflows

Importance of Foreign Ownership and Staggered Adjustment of Capital Outflows

Title:

Importance of Foreign Ownership and Staggered Adjustment of Capital Outflows

Number:

15/31

Author(s):

Özgür Özel, M. Utku Özmen, Erdal Yılmaz

Language:

English

Date:

November 2015

Abstract:

Global financial markets have experienced a liquidity glut since the beginning of the new millennium especially in the aftermath of the 2008-2009 global financial crisis. In this era, the flow of foreign funds to emerging markets have elevated, somewhat more to Turkey. This flow increased foreign investor holdings in emerging markets. This study puts forward the increased share of foreign investors as a potential stabilizer for local financial markets, because domestic investors’ weak absorption capacity may create liquidity constraints acting as an obstacle for foreign outflows. In order to pin down the effect of foreign investor dominance, we present empirical evidence from a detailed stock-ownership data. The detailed micro level data not only helps us unveil the behavior of foreign investors, but also helps us to discuss macroeconomic implications of their micro level decisions. In addition, given that the foreigner’s recent share in Turkish equity market is considerably high both from an historical viewpoint and from a cross section comparison with other emerging markets, the conclusions we reach regarding the market stabilization effect of foreigner share are unique. Overall, in an emerging market with high foreign ownership and low domestic absorption capacity at play, capital outflows might be staggered, rather than sudden.

Keywords:

Capital outflows, Staggered adjustment, Liquidity constraint, Absorption capacity, Foreigner effect

JEL Codes:

C58; E44; F32; G11

Importance of Foreign Ownership and Staggered Adjustment of Capital Outflows
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