Shift in Capital Flows: Local Factors Take Precedence in Emerging Equity Markets

A recent working paper suggests that local factors have surpassed global influences in driving capital flows to emerging equity markets, particularly in the aftermath of COVID-19. This analysis utilizes detailed investor-level data and a dynamic factor model to separate global (push) and country-specific (pull) components of equity flows. Historically, global factors were the dominant driver, but the paper indicates a significant shift where local factors now primarily influence investment decisions.

The findings reveal a notable increase in active return chasing among investors, who are becoming more attuned to local excess returns. This trend suggests a reconnection between capital flows and domestic price discovery. The research was co-authored by Jongrim Ha, Senior Economist at AMRO; Daisoon Kim, Assistant Professor at North Carolina State University; and Inhwan So, Assistant Professor at Hongik University.