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Spillover effects of capital controls on capital flows and financial risk contagion

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  • Fan, Haichao
  • Gou, Qin
  • Peng, Yuchao
  • Xie, Wenjing

Abstract

This paper aims to explicitly investigate the multilateral effects of capital controls on capital flows and the risk contagion from global financial shocks to emerging market economies (EMEs). Using a comprehensive portfolio allocation data set from EPFR and a newly constructed high-frequency similarity-weighted average capital control (SWACC) index of the rest of the world in 19 EMEs from 2001 to 2015, this paper then empirically explore the spillover effect of capital controls on capital flow and capital price co-movement. We find that SWACC is positively associated with the global fund's portfolio weight allocated to a country, the total portfolio flows into that country, and the capital market co-movement between that country and the advanced countries. Further analysis shows that these impacts are more pronounced for capital inflow control or, in extreme circumstances, when capital flows are extremely high or low. Our results are robust to a variety of alternative measures, regression designs, and methods.

Suggested Citation

  • Fan, Haichao & Gou, Qin & Peng, Yuchao & Xie, Wenjing, 2020. "Spillover effects of capital controls on capital flows and financial risk contagion," Journal of International Money and Finance, Elsevier, vol. 105(C).
    • Handle: RePEc:eee:jimfin:v:105:y:2020:i:c:s0261560620301455
    DOI: 10.1016/j.jimonfin.2020.102189
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    5. Filippo Gori & Etienne Lepers & Caroline Mehigan, 2020. "Capital flow deflection under the magnifying glass," OECD Economics Department Working Papers 1613, OECD Publishing.
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    More about this item

    Keywords

    Capital control; Capital flow; Spillover effect; Risk contagion; Emerging market;
    All these keywords.

    JEL classification:

    • F3 - International Economics - - International Finance
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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