U.S. Equity Investment in Emerging Stock Markets

By Linda TesarIngrid Werner
1993| Working Paper No. 1278

This paper examines U.S. equity flows to emerging stock markets in the 1978.1-1991.3 period. We draw four main conclusions from this analysis. First, despite the recent increase in U.S. equity investment in emerging stock markets, the U.S. portfolio remains strongly biased toward domestic equities. Second, of the fraction of the U.S. portfolio that is allocated to foreign equity investment, the share invested in emerging stock markets is roughly in proportion to their share of the global market capitalization value. Third, the volatility of U.S. transactions in emerging market equities is higher than in other foreign equities. However, the normalized volatility of U.S. transactions appears to be falling over time and we find no relationship between the volume of U.S. transactions in foreign equity and local turnover rates or volatility of stock returns. Finally, we find only a weak relationship between U.S. net purchases of foreign equities and financial variables including U.S. and foreign equity returns and U.S. interest rates.