The behavior of stock market prices throughout the episodes of capital inflows

TL;DR

This paper analyzes how stock prices behave during episodes of foreign capital inflows and outflows in emerging markets, revealing that surges do not always lead to appreciation and prices are less vulnerable to reversals.

Contribution

It introduces a combined approach using threshold, k-means clustering, and PELT methods to identify and analyze stock price behavior during capital flow episodes in EMEs.

Findings

Stock indices rarely surge during capital inflow episodes.

Significant stock appreciation occurs mainly during normal capital flow states.

Stock prices are less prone to depreciation during outflow episodes.

Abstract

This study aims to investigate the behavior of stock prices throughout the episodes of foreign capital flows using data of daily stock prices and quarterly foreign capital flows from 14 EMEs. To this end, the episodes of capital flows are identified using the threshold and the k-means clustering approaches. Next, the stock index changepoints are detected using the Pruned Exact Linear Time (PELT) method. Finally, we combine the results by distributing the detected changepoints over the identified capital flows. The results reveal that the stock indices have been rarely pushed further during the entire surge episodes identified by both approaches, and thus surges of capital flows do not necessarily lead to further appreciation of stock prices. In the meantime, a significant appreciation of stock prices is observed during the normal state of capital flows. On the other hand, it is noticed that the stock prices have not often depreciated during the episodes of foreign capital outflows in all the selected EMEs, which means that stock prices have been less vulnerable to reversals of foreign capital flows