Modeling volatility in capital flows and its effect on asset markets in developing economies

Abstract

The extent of capital inflows in an economy has a significant influence on foreign exchange and equity volatility forecasts, especially in developing economies like India. It is known that capital flows can help explain transitory shocks to GARCH volatility in security prices. This will facilitate a better understanding of the behavior of stock prices in such markets, especially in those sectors which are sensitive to such volatility factors. The proposed method will aim at developing a robust time-series model that would be able to predict the nature of changes in sector-wise security prices in developing markets by suitably factoring in volatility in capital inflows that such markets are exposed to.