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Title: Institutional investors and capital flows to emerging markets
Author: Bonizzi, Bruno
ISNI:       0000 0004 6061 061X
Awarding Body: SOAS University of London
Current Institution: SOAS, University of London
Date of Award: 2016
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This dissertation represents an investigation into the determinants of capital flows to emerging markets. It argues that the existing literature can be enriched by explicitly recognising the monetary nature of capital flows, which can be effectively drawn out on the basis of post- Keynesian monetary theory, and recognising the importance of institutional investors as key actors in today's financial markets. As such, the current cycle of capital flows to emerging markets can be understood as the demand for emerging markets assets by institutional investors. The determinants of such a demand are therefore the key focus of this dissertation. Two factors, alongside many others already considered by the literature, stand out. Firstly, in line with post-Keyensian theories of exchange rates, currency liquidity plays an important role. Emerging markets currencies are structurally less liquid and thus subordinated to advanced countries currencies, but the extent of their subordination is mitigated by context-specific 'fundamentals'. This dissertation argues that the accumulation of foreign exchange reserves is a primary factor in these respects. Secondly, this dissertation points out that liabilities play a key role in the institutional investors' portfolio choice mechanism. Rather than mechanically optimising over the risk/return tradeoff, the asset allocation of institutional investors is primarily driven by the goal of achieving sufficient returns to face their obligations. In the post-crisis environment, institutional investors' balance sheet condititions have deteriorated, and - due to low interest rates and low financial market returns on safe assets - traditional asset classes cannot be relied upon to generate sufficient returns to cover liabilities. Institutional investors are therefore induced to look for alternative assets that can promise higher returns and allocate a growing part of their assets to emerging markets assets as part of this strategy. This dissertation uses both qualitative and quantitative methods to support these arguments. It uses advanced macro-panel econometrics techniques to estimate assets demand equations for emerging markets equities and bonds. The econometric results confirm the macro-level significance of the hypothesised relationships, suggesting that higher level of foreign exchange reserves and weaker balance sheet conditions - proxied by lower pension funding ratios - increase allocations to emerging markets. Qualitative methods, in the form of semi-structured interviews, shed further light on the processes that lead to such results. In particular they highlight the complexity of the relationship between the 'fundamentals' and their effect on asset allocation, and the interaction between regulation and the way through which liabilities affect investors' behaviour. Finally the macroeconomics implications of these findings are analysed through a Stock- Flow Consistent model. It is shown that institutional investors may have a pro-cyclical or counter-cyclical impact on the system. Crucially, this is determined by how the dynamics of the model affect institutional investors' balance sheet conditions. Overall, this dissertation warrants caution about the present situation of emerging markets. Institutional investors may be less panic-prone, but ultimately their interest in emerging markets seems to be caused more by their weaker balance sheets, as low returns make it impossible for assets to match their growing liabilities, rather than 'fundamentals'.
Supervisor: Not available Sponsor: Not available
Qualification Name: Thesis (Ph.D.) Qualification Level: Doctoral