Determinants of U.S. Equity Flows to Brazil

This research investigates the impact of global and financial variables on American equity flows to Brazil. Portfolio flows to Brazil increased 159% in 2009. This rapid increase of foreign investment prompted the Brazilian government to impose a 2% tax on some types of foreign portfolio investment. This paper dissects the factors that predict U.S. equity flows into Brazil. Consistent with existing literature on other countries, this research finds that U.S. equity flows follow high local market returns. It is further documented that U.S. equity flows to Brazil are negatively related to returns on the S&P 500 and U.S. prime interest rates. Finally, this paper uncovers two new variables that predict equity flows to Brazil: 1) an increase in the Brazilian equity market volatility negatively forecasts U.S. equity flows to Brazil; and 2) increases in commodity prices positively predict U.S. investment in Brazil where a 1% increase in commodity prices predicts a 0.5% increase in U.S. purchases of Brazilian equities as a percentage of market capitalization.