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Definition: Speculative Flow
Speculative Flow can be described as the transfer of the speculative capital from one asset to different assets or areas of the economy. This flow increases the value of the sock or market sector because of the increased investor demand for these speculative stocks. This movement of speculative capital happens due to the investor expectation of better future returns .
The speculative capital flows are called ‘hot money’ since they can cause market instability as the flow of funds can move very quickly in and out of the markets. Hot Money can also be described as the movement of the capital from one country to another to reap in a short-term profit because of the interest rate differences and the exchange rate shifts. In the beginning of 2011, the US deposit rate was 0.95% whereas for China it was 3%, and the Chinese currency is undervalued against world currencies and likely to appreciate against US dollar. Therefore an investor depositing in the China bank can earn the higher return on its money because of this interest rate difference. This will make China a target for hot money and there will be a movement of funds to China.
We can demonstrate the speculative flow by the help of an example where in an investor believes that the automobile sector because of the new developments should outperform the various other sectors of the economy in the coming year. This will make the investors to change their portfolios and cause them to transfer their speculative capital from their existing stocks to the stocks in the automobile sector thus causing an increase in demand for them. This flow of the speculative capital in the automobile sector will increase its stock prices. The speculative flow is risky and can be due to the above average volatility which may cause losses and hence the investors to avoid any potential losses have their hedge strategies in place.