Risk-On/Risk-Off, Capital Flows, Leverage, and Safe Assets
Abstractï»¿This paper describes the international flow of funds associated with calm and volatile global equity markets. During calm periods, portfolio investment by real money and leveraged investors in advanced countries flows into emerging markets. When central banks in the receiving countries resist exchange rate appreciation and buy dollars against domestic currency, they end up investing in medium-term bonds in reserve currencies. In the process they fund themselves (or â€œsterilizeâ€ the expansion of local bank reserves) by issuing safe assets in domestic currency to domestic investors. Thus, calm periods, marked by leveraged investing in emerging markets, lead to an asymmetric asset swap (risky emerging market assets against safe reserve currency assets) and leveraging up by emerging market central banks. In declining and volatile global equity markets, these flows reverse, and, contrary to some claims, emerging market central banks draw down reserves substantially. In effect emerging market central banks then release safe assets from their reserves, supplying safe havens to global investors.
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Bibliographic InfoPaper provided by East Asian Bureau of Economic Research in its series Macroeconomics Working Papers with number 23390.
Date of creation: Jan 2013
Date of revision:
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More information through EDIRC
global equity markets; porfolio investment; Emerging Markets; central banks;
Other versions of this item:
- Robert N. McCauley, 2012. "Risk-on/risk-off, capital flows, leverage and safe assets," Public Policy Review, Policy Research Institute, Ministry of Finance Japan, vol. 8(3), pages 281-298, August.
- McCauley, Robert, 2013. "Risk-On/Risk-Off, Capital Flows, Leverage and Safe Assets," Journal of Financial Perspectives, EY Global FS Institute, vol. 1(2), pages 145-154.
- Robert N. McCauley, 2013. "Risk-On/Risk-Off, Capital Flows, Leverage, and Safe Assets," Finance Working Papers 23390, East Asian Bureau of Economic Research.
- McCauley, Robert N., 2013. "Risk-On/Risk-Off, Capital Flows, Leverage, and Safe Assets," ADBI Working Papers 405, Asian Development Bank Institute.
- Robert N McCauley, 2012. "Risk-on/risk-off, capital flows, leverage and safe assets," BIS Working Papers 382, Bank for International Settlements.
- E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
- F3 - International Economics - - International Finance
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
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