Macroprudential Regulation of International Finance
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Macroprudential Regulation of International Finance

Managing Capital Flows and Exchange Rates

  • KDI/EWC series on Economic Policy

Edited by Dongsoo Kang and Andrew Mason

Recent events, such as capital flow reversals and banking sector crises, have shaken faith in the widely held belief in the benefits of greater financial integration and financial deepening, which are typical in advanced economies. This book shows that emerging economies have often weathered the storm best despite the supposed burden of ‘weak institutions’. It demonstrates that a better policy framework requires reliable indicators of vulnerability to financial instability, as well as improved policy tools and automatic stabilizers that anticipate and limit the vulnerabilities to financial crises.
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Chapter 12: Risk hedging in Korea’s financial markets: the impact of foreign investors

Changwoo Nam

Extract

When the global economic crisis erupted in 2008, reports appeared in the Korean media that foreign investors were significantly reducing their equity holdings and contributing to the bearish trend in the South Korean stock market. Because of their risk-hedging behavior through trading futures and options, they were also accused of amplifying the volatilities of underlying assets and propelling the fear of recession in Korea. For instance, one news magazine, the Korea Economy Magazine, reported in March 2012: • In South Korea’s stock market, the three principal investors are causing a bloody war. Retail investors, institutional investors and foreign investors are the culprits. Foreign investors in particular change their investment patterns more swiftly than individual investors and institutional investors do, depending on the situation. They have an astronomical base of funds to lift stock prices significantly, and they coolly sell large numbers of shares when a crisis occurs. (Lee, 2012)

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