The asymmetric impacts of international portfolio flows on Australian dollar returns

ABSTRACT

This study investigates how equity portfolio flows affect the transition processes of exchange rate returns in Australia by employing a Markov-switching AR-GARCH-Jump model with time-varying transition probabilities. Three interesting findings are observed. Firstly, both GARCH and jump effects are totally different in the high-volatility and low-volatility states. Secondly, the net equity portfolio inflows increase exchange rate market fluctuations. Thirdly, the marginal effect of net equity flows is stronger in low-volatility state than in high-volatile state.

KEYWORDS:

• International portfolio flows
• exchange rate
• Markov-switching jump
• asymmetric effect

JEL CLASSIFICATION:

• C50
• F31
• G15

Acknowledgment

The authors acknowledge an anonymous referee for helpful suggestions and comments.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

¹ See, for example, Bollerslev (1990), Chang and Kim (2001), Cheung and Erlandsson (2005), Dueker and Neely (2007), Caporale et al. (2017), and Menla Ali, Spagnolo, and Spagnolo (2017).

² Compared to specifications of Caporale et al. (2017) and Menla Ali, Spagnolo, and Spagnolo (2017), which do not consider the GARCH and jump effects, this study investigates the impacts of net equity portfolio inflows on transition probabilities under a richer dynamic specification.

³ The diagnostic results are available upon request.

⁴ When the jump risk is omitted, the impact of NFE will be seriously over-estimated during the high-volatility period and slightly under-estimated during the low-volatility period. An inappropriate specification will misestimate the effects, subsequently making inaccurate information for policy design.

Additional information

Funding

This work was supported by the Ministry of Science and Technology, Taiwan.