Irwan Adi Ekaputra

Foreign Portfolio Investment Flows and Exchange Rate: Evidence in Indonesia

ABSTRACT Using unique daily foreign transactions data in both stock and bond markets, we investigate the daily dynamics of the IDR/USD exchange rate and foreign portfolio investment flows. Based on an unrestricted vector autoregression (VAR) model, we find feedback relations between capital market net foreign inflows (NFI) and IDR/USD returns. Further investigation by decomposing capital market NFI into bond market NFI and stock market NFI reveals that only bond market NFI has feedback relations with IDR/USD returns. Meanwhile, we find only a unidirectional relation in the stock market, where stock market NFI does not Granger cause IDR/USD returns, but IDR/USD returns lead stock market NFI. The results suggest that foreign investors tend to rebalance their international portfolio and chase higher returns in the bond market. Additionally, we learn that bond market NFI leads stock market NFI, which means that foreign investments flow to (from) the bond market before they flow to (from) the stock market. Further analysis utilizing dynamic conditional correlation in the bond market confirms the bidirectional relations between NFI and IDR/USD returns. Hence, foreign participation in the bond market appears to yield more impact on the exchange rate than its participation in the stock market.

How Integrated are the ASEAN Capital Markets

We analyze the ASEAN stock markets from a market microstructure perspective, focusing on liquidity and volatility. We find Indonesia and Thailand share similar patterns and magnitude of liquidity and volatility, indicating partial integration happens naturally for these two markets. Further analysis on the sensitivity of stock exchange performance to international information reveals that, again, Indonesia and Thailand are the most sensitive to international financial market information. This finding indicates that Indonesia and Thailand may have substantial foreign investors’ presence in their stock markets. Further empirical evidence shows that while integration would provide greater liquidity in ASEAN stock markets, the liquidity risk is also transmitted among them. We find the transmission of systematic liquidity risk in the region could happen in only one day. Our analysis of dynamic integration reveals time-varying integration in the ASEAN region from 2000 to 2012. Without government intervention, ASEAN capital markets show the most stable integration during 2005-2007. Unfortunately, integration does not hold in the long-term or it is short term in nature.