Foreign investment fluctuations and emerging market stock returns: the case of Mexico

Elizabeth Berko and John Clark

No 24, Staff Reports from Federal Reserve Bank of New York

Abstract: We investigate the economically and statistically significant positive correlation between monthly foreign purchases of Mexican stocks and Mexican stock returns. We find that a 1 percent of market capitalization surprise foreign inflow is associated with a 13 percent increase in Mexican stock prices. We explore whether this correlation might be explained by permanent reductions in conditional expected returns resulting from expansion of the investor base along the lines modeled by Merton (1987), or correlations with other factors causing returns, price pressures, or positive feedback strategies by foreign investors, and conclude that the available evidence is consistent with the base-broadening hypothesis.

Keywords: Investments, Foreign; Stock - Prices; Mexico (search for similar items in EconPapers)
Date: 1997
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