2022-07-28-ADB-Foreign_Fund_Flows_and_Equity_Prices_during_the_COVID19_Pandemic_Evidence_from_India_32页_1mb

Foreign fund flows significantly impact Indian stock prices during the COVID-19 pandemic, showcasing an interaction of information and price pressure effects. Abnormally high inflows result in a permanent price increase, while abnormal outflows cause temporary volatility that partly reverses. During the crisis, especially the pre-stabilization phase (January-June 2020), price effects and reversals intensified due to heightened risk aversion.

The Federal Reserve's stabilization policies during March-April 2020 effectively mitigated these effects, dampening the flow-price relationship and restoring market behavior closer to normal conditions.

Historical analyses during the Taper Tantrum (2013) and Global Financial Crisis (2008) show similar patterns of temporary price reversals and flight-to-safety behaviors, but the COVID-19 crisis featured higher magnitudes, particularly when anticipation of adverse effects amplified market reactions.

Key findings:

• Foreign fund flow innovations determine short-term price volatility and longer-term price discovery.
• Pre-COVID and crisis phases differ mainly in amplification, not the existence, of the fund flow impact.
• Policy interventions during COVID-19 reduced transient volatility and stabilized markets.

The study provides a methodology for policymakers to assess stabilization measures in managing foreign fund flow impacts during crises, offering insights into balancing short-term volatility and long-term price formation.