Impact of Foreign Portfolio Investments on Select Advanced Economies

Abstract

Advanced economies or developed countries are the ones at the top of all developmental, economic and social indicators. They have post-industrial economies, they were the first ones to have reaped the benefits of industrialization. According to the International Monetary Fund, advanced economies comprise 60.8% of global nominal GDP and 42.9% of global GDP (PPP) in 2014.

Since advanced countries were the first one to develop and prosper after industrialization, they also possess the most mature and developed financial markets too. In this paper we examine the relationship between Foreign Portfolio Investment (FPI) and major stock market indices of the selected advanced nations, viz. US, UK, Japan and Germany. We used net flows of foreign portfolio investments received by these advanced countries and their major stock market indices to establish the relationship. The stationarity of the data series are checked using Augmented Dickey Fuller (ADF) Test and tested for the autocorrelation, regression analysis is undertaken and Vector Autoregression (VAR) is applied.

Keywords: foreign portfolio investments, advanced countries, stock market