This work investigates the effects of equity returns, exchange rates, interest rates and a country risk measure on foreign portfolio investment flows to the Brazilian equity market. Data is monthly from 1995 to 2005. Causality and exogeneity relations are tested. The results point out the rational behavior of foreign investors, who enter the market after a fall and withdraw after a rise of the Bovespa index. Past returns are found to be important in the investment decision. When the domestic currency appreciates in face to the US dollar, foreign investors reduce their exposure to the Brazilian market. The evidence also indicates the exchange crises of January 1999 affected foreign investment. Inflows of investments are stimulated by better external debt evaluation and are also related to the Brazilian interest rate. The Sharpe ratio shows that the higher risk of the Brazilian market is rewarded by higher return. After several diagnostic tests, the model proposed is found to be appropriate for inference use, but not for prediction or policy purposes.
portfolio investment; equity return; exchange rate variation
