Does foreign portfolio investment moderate the impact of exchange rate volatility and investor sentiment on country index crash risk?

Abstract

This study evaluates the relationship investor sentiment, exchange rate volatility, net foreign portfolio investment and the country index crash risk. The moderating variable, net foreign portfolio investment, is introduced. While previous crash risk studies typically focus on individual firms, this study takes a country-level perspective. CRASH, NCSKEW and DUVOL represent the Country Index Crash risk. The data will be analyzed using EViews software, including panel data from logistic regression and OLS regression using a two-dimensional clustered standard error method. The findings demonstrate the importance of exchange rate fluctuations and investor mood in affecting the country index crash risk. The influence of Net Foreign Portfolio Investment on the crash risk is negligible. Moreover, the study reveals that higher Net Foreign Portfolio Investment does not strengthen the impact of Investor Sentiment but weakens its influence in conjunction with Exchange Rate Volatility on the country index crash risk.

Keywords:

• Net foreign portfolio investment
• investor sentiment
• exchange rate volatility
• country index crash risk
• CRASH
• NCSKEW
• DUVOL

REVIEWING EDITOR:

• David McMillan, University of Stirling, UNITED KINGDOM

SUBJECTS:

• Economics; Finance; Business
• Management and Accounting

JEL Classification Code:

• E60
• F20
• F21
• F40
• F60
• F65
• G10
• G15
• G33

Disclosure statement

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

Additional information

Funding

This work was supported by the Universitas Padjadjaran.

Notes on contributors

Lisa Kustina

Lisa Kustina, Doctoral Program in Management Science, Faculty of Economics and Business, Universitas Padjadjaran, Bandung, West Java, Indonesia.

Rachmat Sudarsono

Rachmat Sudarsono, Doctoral Program in Management Science, Faculty of Economics and Business, Universitas Padjadjaran, Bandung, West Java, Indonesia.

Nury Effendi

Nury Effendi, Doctoral Program in Management Science, Faculty of Economics and Business, Universitas Padjadjaran, Bandung, West Java, Indonesia.