Changing Times for Frontier Markets: A Perspective from Portfolio Investment Flows and Financial Integration

IMF Working Papers, August 23, 2016

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Research question: To what extent low-income developing countries (LIDCs) characterized as frontier markets (FMs) have begun to be subject to capital flows dynamics typically associated with emerging markets (EMs).
Sample and period: a sample of developing countries covering the period 2000–14.
Main empirical findings:
- (i) average annual portfolio flows to FMs as a share of GDP outstripped those to EMs by about 0.6 percentage points of GDP;
- (ii) during years of heightened stress in global financial markets, portfolio flows to FMs dried up like those to EMs;
- (iii) FMs have become more integrated into international financial markets.
Key implication: In terms of portfolio flows, FMs have become more similar to EMs than to the rest of LIDCs and are therefore more vulnerable to swings in global financial markets conditions.

Strengthen resilience frameworks for frontier markets to mitigate adverse capital flow shocks.
Prioritize policies and institutional arrangements that can reduce vulnerability arising from increased integration into international financial markets.

Subject: Balance of payments, Capital flows, Emerging and frontier financial markets, Financial integration, Financial markets, Globalization, Private capital flows
Keywords: Balance of Payments Needs, Capital flows, crisis dummy, Emerging and frontier financial markets, Financial Integration, FM bond, FM group, FMS relative, Frontier Markets, Global, global bond, integration Hypothesis, market beta, portfolio flow, Portfolio flows, Private capital flows, qualification criteria, segmentation hypothesis, WP

6. ICAPM Estimation Results
- 6. ICAPM Estimation Results (Markdown version)
- 6. ICAPM Estimation Results (PDF)