Overreaction in capital fl ows to emerging markets : Booms and sudden stops q

Content Provider	Semantic Scholar
Author	Agosín, Manuel R. Huaita, Franklin
Copyright Year	2012
Abstract	This paper applies the overreaction hypothesis of De Bont and Thaler [De Bont, W., Thaler, R., 1985. Does stock market overreact? Journal of Finance 40(3), 793–805], developed for stock price behavior, to capital flows to emerging markets. We find that a surge in capital flows, or what we call a capital boom, can predict future sharp contractions in capital flows, or sudden stops. We use a large list of possible economic fundamentals as control variables, and the results show that the best predictor of a sudden stop is a preceding capital boom. Moreover, the probability of a country undergoing a sudden stop increases considerably with the length of the boom: this probability more than doubles when the boom is three years old, and rises by three to four times when the boom lasts for four years. These results are interesting for two reasons. In the first place, they contradict previous studies that emphasize worsening fundamentals as the ultimate cause of a sudden stop. Second, they are of policy interest because of the enormous negative impacts that sudden stops have on the real economy. 2011 Elsevier Ltd. All rights reserved. ree for useful comments to an earlier draft. They are also thankful for the the Central Bank of Chile, the Department of Economics of the University of n and Caribbean Economic Associacition (LACEA) in Buenos Aires, Argentina and Business of the University of Groningen. Franklin Huaita is thankful to 21050491. Oficina 1501, Santiago, Chile. Tel.: þ56 2 978 3984.
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Language	English
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Resource Type	Article