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  5. Hot Money and Cross-Section of Stock Returns during the Global Financial Crisis

Hot Money and Cross-Section of Stock Returns during the Global Financial Crisis

年度:2016 NO: 著者:Daehwan Kim and Seiichiro Iwasawa

The literature in international finance has suggested that speculative capital flow in pursuit of short-term profit--“hot money”--can make the recipient countries, especially emerging market countries where capital flows can be large compared with the size of their domestic financial markets, vulnerable to subsequent adverse shocks, such as global financial crises. In this paper, we investigate a hitherto unexplored aspect of the hot money phenomenon: the effect of hot money at the individual stock level. We show that, in the South Korean stock market, foreign capital flow right before the global financial crisis can be characterized as hot money, and that a larger increase in foreign investors’ ownership of a particular stock in the pre-crisis period resulted in a bigger decline in their ownership of the stock, a sharper drop in the stock’s price, and higher volatility of the stock during the crisis. The results are robust after controlling for several firm characteristics and risk factors. Our findings supplement the existing evidence for the destabilizing effect of certain international capital flows.