Foreign Investors Under Stress: Evidence from India

Emerging market policy makers have been concerned about the financial stability implications offinancial globalization. These concerns are focused on behavior under stressed conditions. Do tailevents in the home country trigger off extreme responses by foreign investors – are foreign investors`fair weather friends'? In this, is there asymmetry between the response of foreign investors to verygood versus very bad days? Do foreign investors have a major impact on domestic markets throughlarge inflows or outflows – are they 'big fish in a small pond'? Do extreme events in world marketsinduce extreme behavior by foreign investors, thus making them vectors of crisis transmission? Wepropose a modified event study methodology focused on tail events, which yields evidence on thesequestions. The results, for India, do not suggest that financial globalization has induced instability onthe equity market.