Foreign equity flows: Boon or bane to the liquidity of Malaysian stock market?
Document Type
Article
Publication Date
1-1-2018
Abstract
This paper examines the impact of gross foreign equity inflows on aggregate liquidity of the Malaysian stock market using newly assembled foreign trading data and the best performing bid-ask spread proxy. Employing vector autoregression, we discover a one-way causality from gross inflows to aggregate liquidity, and foreign investors erode liquidity of the Malaysian stock market. Additional analyses reveal that uncertainties in the U.S. markets negatively affect aggregate liquidity through the flows of foreign institutions, whose positive feedback trading destabilizes the local bourse. Despite the shocks, there is sufficient liquidity provision from local state-backed institutional funds and local proprietary day traders.
Keywords
Foreign equity flows, Aggregate liquidity, Malaysian stock market, Vector autoregression, VIX
Divisions
FacultyofEconomicsAdministration
Funders
Malaysian Ministry of Higher Education: Fundamental Research Grant Scheme (Grant No: FP020-2014B)
Publication Title
The North American Journal of Economics and Finance
Volume
45
Publisher
Elsevier