Short-term rates of return on uncovered interest rate arbitrage and capital flows in Poland

Abstract

The paper aims to estimate the strength of influence of the expected rate of return and associated risk on directions and size of capital flows in Poland. Estimated correlations indicate material conditions accompanying investment decisions of foreign investors. When deciding on a purchase of debt securities in the Polish market, they in reality analyse a relation of risk to yield, although they attach more importance to the risk inherent in an investment than to the potential rate of return. Observation of such behaviour can be of high importance in the run-up to Poland's accession to the European Union. In the case of Poland's economic stability being maintained and widened, lower yields on Polish financial assets can still attract foreigners to invest in the Polish market. Stability of portfolio capital flows can be achieved not only by "funding" high rates of return to foreign portfolio investors but first of all by reducing the investment risk. A prerequisite for the latter is a credible economic policy that investors can put their trust in. (original abstract)