Stock Market Crash Induced Capital Flight: Experience of an Emerging Economy

Abstract

The Stock Markets of Bangladesh crashed in FY 2010-2011 after a boom. High daily turnover before the crash brought out hundreds of billions BDT from the capital market, but neither money supply outside the banks nor money deposit in the banks changed accordingly. Overall the post-crash scenario created a suspicion that the money which was withdrawn from the capital market flew out of the country. The study attempts to test the hypothesis of capital flight using the daily data from Aug 1, 2010, to Jul 31, 2011, of three variables: the Dhaka Stick Exchange general index, weighted average exchange rate, and the foreign exchange reserves. The causal relationships measured indicate that capital flight occurred and the central bank might have camouflaged the issue by foreign reserve management to keep the exchange rate relatively stable.