Using this flow and stock data is novel, but I wonder whether it has the power to discern the impact of foreign investors during any episode. To the extent that foreigners transact offshore among themselves, the data may not detect transactions that result in price pressure but no change of ownership between foreign and domestic hands. In each of these five episodes, the authors argue that investors in general and foreign investors in particular are not guilty of either cre- ating or exacerbating a domestic financial market crisis. However, foreign investors may not be out of the picture and there- fore off the hook. The authors acknowledge that foreign investors have played more than an incidental part in these crises.
Market discipline is a critical element of a competitive financial market.
It may be that international investors play a special disciplinary role in many markets, because they can more readily compare the valuation of currencies, equities, and bonds across markets and reallocate their portfolios on the basis of this analysis. I will return to this topic. I now want to highlight three themes regarding the internationaliza- tion of financial markets and financial instability. The crash of 1987 began in the United States and spread worldwide. OCR for page 369 Linda L. Tesar and Ingrid M. Werner 369 Debt of Externally Indebted Countries.