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International Fund Flows and the Predictability of Equity Returns

Explore how global fund movements can predict country equity performance using TIC data and economic variables, with a focus on US flows impacting market returns.

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International Fund Flows and the Predictability of Equity Returns

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  1. International Fund Flows and the Predictability of Equity Returns Harley Adams Brenna Copeland Van Menard Mary Rachide Erik Schneider February 28, 2002

  2. Agenda • Hypothesis • Project Data • Background • Methodology • Results • Next Steps

  3. Hypothesis • Flow of funds between foreign countries and the US can be predictive of country equity performance. • US flows: • Into an economy should predict positive returns • Out of an economy should predict negative returns

  4. Data: Creating the Benchmark • DataStream • MSCI country monthly index returns in USD • Local foreign currency exchange rates to USD • Salomon Brothers Brady Bond local country monthly index return • MSCI US & MSCI World monthly total return indices • Goldman Sachs World Energy Returns Index • 30-day Eurocurrency rate

  5. Data: Testing the Hypothesis • Treasury International Capital (TIC) • Gross US purchases and sales of foreign stocks • Limitations • 2-month time lag • Revisable for 24 months after publication • Captures location of transaction, not residence of transactor

  6. Background • Why would funds move? • The local market is under performing • Local economy is booming; market is considered over-valued • Political instability is generating sovereign risk • No relationship • We hope to determine correlation between funds flows and market performance, if any.

  7. Methodology • Benchmark regressions w/ logical economic variables • Add TIC data and Evaluate Resulting Models • Argentina, Brazil, Venezuela and Mexico • Net and gross flows; binned net and gross flow predictions. • Create basic trading strategy to evaluate effectiveness • Pick country equities or the 30-day Eurodollar deposit • Aggregate statistics about directional count

  8. Results • Trading Strategy using TIC data provides superior volatility adjusted returns compared to either buy and hold or base case. • Appears that flows predict movements opposite of our expectations • US Flows OUT predict positive market returns

  9. Next Steps • Portfolio Allocation • Test TIC data effectiveness over time • Evaluate flows in and out of US Treasuries

  10. Questions

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