Foreign Equity Flow and Stock-Return Volatility: Evidence from the

In this study, we examine the impact of foreign equity flow on the aggregated stock-return volatility. By using the foreign equity flow to detect the volatility impacts on stock returns, we eliminate several problems that arise in previous literature, such as the imprecision involved in dating the liberalization and in detecting effective foreign participation. Furthermore, rather than analyzing the return volatility of a market portfolio, as previous studies did, we use the aggregated total volatility of stock returns. Our aggregated volatility measure is independent of the correlation of the stock returns and therefore is a pure measure of the return volatility of a typical stock in a country. We also attempt to find out the channels through which foreign equity flow affects the aggregated total volatility. For this purpose, the aggregated return volatility of stocks is decomposed into its components in a modified market model that accounts for the partially segmented, partially integrated nature of emerging markets. Under this model, we derive the global, local, and idiosyncratic volatility components for the aggregated total volatility. The results show that an equity inflo