United States equity investment in international markets

Over the past 30 years, obstacles to international equity investment have been dramatically reduced. Since international equity markets provide investors with wider diversification opportunities and since foreign investors attract extensive attention from policymakers, some issues regarding relationships between foreign equity flows and local market returns need to be addressed.; This study investigates these issues and is based on data for U.S. investments in equities traded in thirteen emerging markets and six developed markets over the period of 1988 through 2001. The focus is to examine the relationship between foreign equity flows and equity returns in emerging markets while using developed markets as the benchmark. In addition, this study investigates whether foreign equity flows behave differently during financial crisis periods.; Three specific issues are addressed. First is the investigation of whether international investors invest in foreign markets using feedback trading and whether foreign equity flows reflect new information on the local markets. The second issue relates to the specific nature of international equity flows and their interaction with equity returns. Specifically, the role of flow volatility in returns and the role of return volatility in flows are investigated. Finally, this study examines whether international equity flows behave differently during two important financial market crisis periods: the 1994 Mexican peso crash and the 1997 Asian crisis.; The findings of this research have implications for both investors and policymakers. Investors should benefit from a better understanding of foreign equity markets by comparing emerging markets with developed markets. The findings should benefit policymakers by contributing to an understanding of the extent to which foreign portfolio flows affect equity returns and volatility of equity returns. Thus analysis of different patterns of equity flows before, during, and after financial crisis periods should be particularly useful to policymakers in emerging markets when they attempt to effectively handle foreign portfolio investments in the event of financial crises.