This paper explores daily international portfolio flows into and out of 44
countries from 1994 through 1998. We find several facts concerning the beha
vior of flows and their relationship with equity returns. First, we detect
regional flow factors that have increased in importance through time. Secon
d, the flows appear to be stationary, but far more persistent than returns.
Third, flows are strongly influenced by past returns, a finding consistent
with positive feedback trading by international investors. Fourth, inflows
have positive forecasting power for future equity returns, and this power
is statistically significant in emerging markets. Fifth, the sensitivity of
local stock prices to foreign inflows is positive and large. Sixth, prices
seem consistent with flow persistence, in that transitory inflows impact f
uture returns negatively. (C) 2001 Elsevier Science S.A. All rights reserve
d. JEL classification: G15; F21; G11.