Hot money and cross-section of stock returns during the global financial crisis

We investigate a hitherto unexplored aspect of the hot money phenomenon: the effect of hot money at the individual stock level. In the South Korean stock market, foreign capital flow right before the global financial crisis can be characterized as hot money. A larger increase in foreign investors' ownership of a particular stock in the pre-crisis period resulted in a bigger decline in their ownership of the stock, a sharper drop in the stock's price, and higher volatility of the stock during the crisis. Our findings supplement the existing evidence for the destabilizing effect of certain international capital flows.