GAME THEORY AND CAPITAL FLOWS IN EMERGING MARKET UPGRADES: INSIGHTS FROM VIETNAM'S STOCK MARKET
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Abstract
This study employs a game-theoretic and empirical framework to examine capital inflows and investor behavior in the context of Vietnam's anticipated upgrade from frontier to emerging-market status. The analysis models strategic interactions among active, passive, sovereign, and institutional funds using three distinct game-theoretic structures: competition, coordination, and auction games. These theoretical mechanisms are subsequently linked to observed ETF-flow and liquidity data, as well as stylized evidence on IPO demand and foreign ownership limits. Comparative benchmarks drawn from prior upgrade episodes in Korea, Taiwan, and Saudi Arabia are used to contextualize Vietnam's potential inflow ranges and valuation effects within an international framework. Descriptive statistics and graphical evidence illustrate how upgrade-related news coincides with shifts in market volatility, capitalization, and trading activity. The analysis highlights the central role of regulatory reforms, global investor trends, and sector-level constraints, particularly foreign ownership limits and the growing influence of Gulf sovereign wealth funds, in determining the size and composition of capital inflows. The findings generate policy recommendations for regulators, listed firms, and fund managers regarding strategies to expand absorption capacity, strengthen market infrastructure, and manage liquidity and systemic risk during the upgrading process. The proposed game-theoretic framework, anchored in empirical benchmarks, has broader applicability to other emerging markets undergoing or preparing for index-status reclassification.
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market upgrade, game theory, capital inflows, emerging markets, Vietnam equity market
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