Schweser says capital flow "do not become more volatile post-liberalization" whereas CFAI book says otherwise

found an example where they clearly contradict the CFAI book…

S12. R30. Emerging Market Finance

( On Liberalization )

Schewer Book 3, pg 211.

“For The Exam: …” You should be able to integrate topic reviews 19 and 30 and recognize that capital flows do not become more volatile post-liberalization , even though it is commonly thought that they do"

CFA Book 4 pg 310-311

ridiclously long, rambling paragraphs of research results…

but I think they are saying ‘capital flow becomes more volatile after liberalization, and capital flow is generally more volatile in developed markets anyway’

I’d obviously go with CFA book here. Thoughts?

Capital flows are more volatile when the EM country is ins a liberalization process. this is due to portfolio rebalancing in develop world ( people rebalance their portfolio and invest in the EM country that is being liberalize) after a couple of years ( 2-3 ) capital flow volatility go back to normal very quickly. So post-liberilization, yes volatility does not really increase. you can look at figure 1 and figure 8 to understand more indepth the concept.

Summerside182,

Yes both books agree that during liberaliation process, vol is higher.

But as far as post-liberalization vol is concerned. I don’t think you can back up your statement “So post-liberilization, yes volatility does not really increase”.

Figure 1 is not relevant. And you can’t conclude from Figure 8 that post-liberalization volatility comes down. It was low for EM on 1996-1997 but even the authors don’t make the claim the general claim that post-liberalization volatility comes down, just from this graph, because it goes right back up. Not to mention this simple graph in no way establishes causality. So I don’t see how you can make the claim.

if I can conclude anything from Figure 8, it would be that it appears there’s a long-term trend of rising volatility since 1980s.

cant beleive I am arguing on this.

lets take a look at the figure 8, the general trend of the Capital flow volatility is going obviously up. Knowing that developed are liberalize, there is no such thing as liberalization process for the dev curve. So as I am watching this curve I can tell that the general volatility of capital flow in the world is going up and has no relation whatsoever with liberilaziation ( since all dev contries ar liberalized ). Now I look at the EM curve, trend is also going up but as you can see not as much as the developed curve. so in 1995 I see the big liberilization spike, then it decrease and doesnt trend up as much as the dev curve. So by this I can pretty much tell that general volatility of Capital flow ( excluding liberilization effect ) is increasing less than in the developed market ( since the CV EM curve is obviously trending less up than the Dev curve ) so by this observation I have no problem telling you that post-liberilization has no real effect on vol.

Said other wise, after the 1995 spike, if the post-liberalization had an effect on capital flow vol, I would have seen a greater up trend from 1997 to 2000 on the EM curve than the Dev Curve ( since both curve is exposed to the general up trending effect of the volatility )

i.e.

trend in volatily of capital flow in Dev = general capital flow vol factor + other

trend in volatility of EM capital flow = general capital flow vol factor + post liberalization effect + other