Local Influences and Return Chasing: Entering a New Era in Emerging Equity Markets

This paper examines a shift in global equity flows, driven by investor sensitivity to local returns post-COVID-19. The study, conducted by Jongrim Ha, Daisoon Kim, and Inhwan So, utilized detailed investor-level data and a dynamic factor model to analyze the drivers behind capital flows to emerging markets. Historically, global factors had a strong influence on these flows; however, the research reveals that local, country-specific factors have now taken precedence.

The study shows that investors are increasingly focusing on local excess returns, emphasizing the role of domestic price discovery mechanisms. This recalibration illustrates a renewed emphasis on local market conditions and highlights the shift in active return chasing among investors. In the post-pandemic landscape, investors are particularly interested in markets with robust local price discovery mechanisms, where their domestic factors exert more influence on investment decisions than global trends.

The collaborative effort between Ha, Kim, and So provides a comprehensive examination of the dynamic relationship between global financial cycles and country-specific investment drivers. Their research sheds light on how investor behaviors are shifting in response to changes in both global and local market conditions, offering valuable insights into the evolving landscape of emerging equity markets.