IDEAS home Printed from https://ideas.repec.org/p/ecb/ecbwps/20131609.html
   My bibliography  Save this paper

Foreign investors and risk shocks: seeking a safe haven or running for the exit?

Author

Listed:
  • Stracca, Livio
  • Habib, Maurizio Michael

Abstract

In this paper we study the impact of shocks to global risk and global risk aversion (such as Lehman) as well as shocks with a more idiosyncratic nature (such as the euro debt crisis) on cross border portfolio flows, taking the perspective of foreign investors. We find robust evidence of systematic portfolio outflows in the wake of both types of shocks. There are no securities which are consistently safe haven assets, namely experiencing portfolio inflows when risk is on the rise or perceived to be high. Nevertheless, especially money market instruments issued by the US, euro area low-yield countries and Japan, as well as securities issued in Switzerland have behaved as safe haven assets in specific episodes or following changes in certain risk measures. We also find that the role of US-based crises and risk shocks is special, with the US not necessarily experiencing portfolio outflows or even attracting inflows for short-term dated securities, as a safe haven country, in those episodes. JEL Classification: G11, G15

Suggested Citation

  • Stracca, Livio & Habib, Maurizio Michael, 2013. "Foreign investors and risk shocks: seeking a safe haven or running for the exit?," Working Paper Series 1609, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20131609
    Note: 335958
    as

    Download full text from publisher

    File URL: https://www.ecb.europa.eu//pub/pdf/scpwps/ecbwp1609.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Portes, Richard & Rey, Helene, 2005. "The determinants of cross-border equity flows," Journal of International Economics, Elsevier, vol. 65(2), pages 269-296, March.
    2. Lieven Baele & Geert Bekaert & Koen Inghelbrecht & Min Wei, 2020. "Flights to Safety," The Review of Financial Studies, Society for Financial Studies, vol. 33(2), pages 689-746.
    3. Bekaert, Geert & Hoerova, Marie & Lo Duca, Marco, 2013. "Risk, uncertainty and monetary policy," Journal of Monetary Economics, Elsevier, vol. 60(7), pages 771-788.
    4. Harald Hau & Helene Rey, 2008. "Home Bias at the Fund Level," American Economic Review, American Economic Association, vol. 98(2), pages 333-338, May.
    5. Fernando Broner & Alberto Martin & Jaume Ventura, 2010. "Sovereign Risk and Secondary Markets," American Economic Review, American Economic Association, vol. 100(4), pages 1523-1555, September.
    6. Okawa, Yohei & van Wincoop, Eric, 2012. "Gravity in International Finance," Journal of International Economics, Elsevier, vol. 87(2), pages 205-215.
    7. Stijn Van Nieuwerburgh & Laura Veldkamp, 2009. "Information Immobility and the Home Bias Puzzle," Journal of Finance, American Finance Association, vol. 64(3), pages 1187-1215, June.
    8. Mondria, Jordi & Wu, Thomas & Zhang, Yi, 2010. "The determinants of international investment and attention allocation: Using internet search query data," Journal of International Economics, Elsevier, vol. 82(1), pages 85-95, September.
    9. Alexander D. Rothenberg & Francis E. Warnock, 2011. "Sudden Flight and True Sudden Stops," Review of International Economics, Wiley Blackwell, vol. 19(3), pages 509-524, August.
    10. Broner, Fernando & Didier, Tatiana & Erce, Aitor & Schmukler, Sergio L., 2013. "Gross capital flows: Dynamics and crises," Journal of Monetary Economics, Elsevier, vol. 60(1), pages 113-133.
    11. Forbes, Kristin J. & Warnock, Francis E., 2012. "Capital flow waves: Surges, stops, flight, and retrenchment," Journal of International Economics, Elsevier, vol. 88(2), pages 235-251.
    12. Mondria, Jordi & Wu, Thomas, 2010. "The puzzling evolution of the home bias, information processing and financial openness," Journal of Economic Dynamics and Control, Elsevier, vol. 34(5), pages 875-896, May.
    13. Mark Grinblatt & Matti Keloharju, 2001. "How Distance, Language, and Culture Influence Stockholdings and Trades," Journal of Finance, American Finance Association, vol. 56(3), pages 1053-1073, June.
    14. Ahearne, Alan G. & Griever, William L. & Warnock, Francis E., 2004. "Information costs and home bias: an analysis of US holdings of foreign equities," Journal of International Economics, Elsevier, vol. 62(2), pages 313-336, March.
    15. Habib, Maurizio M. & Stracca, Livio, 2012. "Getting beyond carry trade: What makes a safe haven currency?," Journal of International Economics, Elsevier, vol. 87(1), pages 50-64.
    16. Michael B. Devereux & Alan Sutherland, 2011. "Country Portfolios In Open Economy Macro‐Models," Journal of the European Economic Association, European Economic Association, vol. 9(2), pages 337-369, April.
    17. Mr. Jochen R. Andritzky, 2012. "Government Bonds and their Investors: What Are the Facts and Do they Matter?," IMF Working Papers 2012/158, International Monetary Fund.
    18. Gehrig, Thomas, 1993. " An Information Based Explanation of the Domestic Bias in International Equity Investment," Scandinavian Journal of Economics, Wiley Blackwell, vol. 95(1), pages 97-109.
    19. Pierre Collin-Dufresn & Robert S. Goldstein & J. Spencer Martin, 2001. "The Determinants of Credit Spread Changes," Journal of Finance, American Finance Association, vol. 56(6), pages 2177-2207, December.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Leroi RAPUTSOANE, 2016. "Real Effective Exchange Rates Comovements and the South African Currency," Journal of Economics Library, KSP Journals, vol. 3(1), pages 57-68, March.
    2. Belke, Ansgar & Klose, Jens, 2021. "Safe haven flows, natural interest rates and secular stagnation—Empirical evidence for Euro area countries," International Review of Economics & Finance, Elsevier, vol. 76(C), pages 1164-1190.
    3. Agust n S. B n trix & Philip R. Lane, "undated". "Cross-Country Exposures to the Swiss Franc," Trinity Economics Papers tep0116, Trinity College Dublin, Department of Economics.
    4. Pınar Yeşin, 2017. "Capital Flows and the Swiss Franc," Swiss Journal of Economics and Statistics, Springer;Swiss Society of Economics and Statistics, vol. 153(4), pages 403-436, October.
    5. Agustín S. Bénétrix & Philip R. Lane, "undated". "Cross-Country Exposures to the Swiss Franc," Trinity Economics Papers tep0116, Trinity College Dublin, Department of Economics.
    6. Stefan Goldbach & Volker Nitsch, 2022. "Covid-19 and Capital Flows: The Responses of Investors to the Responses of Governments," Open Economies Review, Springer, vol. 33(4), pages 751-774, September.
    7. Meegan, Andrew & Corbet, Shaen & Larkin, Charles, 2018. "Financial market spillovers during the quantitative easing programmes of the global financial crisis (2007–2009) and the European debt crisis," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 56(C), pages 128-148.
    8. Habib, Maurizio Michael & Floreani, Vincent Arthur, 2015. "Financial exposure to the euro area before and after the crisis: home bias and institutions at home," Working Paper Series 1799, European Central Bank.
    9. McQuade, Peter & Falagiarda, Matteo & Tirpák, Marcel, 2015. "Spillovers from the ECB's non-standard monetary policies on non-euro area EU countries: evidence from an event-study analysis," Working Paper Series 1869, European Central Bank.
    10. repec:ecb:ecbwps:20141799 is not listed on IDEAS

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Nicolas Coeurdacier & Hélène Rey, 2013. "Home Bias in Open Economy Financial Macroeconomics," Journal of Economic Literature, American Economic Association, vol. 51(1), pages 63-115, March.
    2. repec:hal:spmain:info:hdl:2441/c8dmi8nm4pdjkuc9g81p7j6b6 is not listed on IDEAS
    3. repec:hal:spmain:info:hdl:2441/1shj1p7td8e0r5c9fcsnk8a91 is not listed on IDEAS
    4. repec:hal:wpspec:info:hdl:2441/c8dmi8nm4pdjkuc9g81p7j6b6 is not listed on IDEAS
    5. repec:spo:wpecon:info:hdl:2441/c8dmi8nm4pdjkuc9g81p7j6b6 is not listed on IDEAS
    6. Malmendier, Ulrike & Pouzo, Demian & Vanasco, Victoria, 2020. "Investor experiences and international capital flows," Journal of International Economics, Elsevier, vol. 124(C).
    7. Tille, Cédric & van Wincoop, Eric, 2014. "International capital flows under dispersed private information," Journal of International Economics, Elsevier, vol. 93(1), pages 31-49.
    8. Eichler, Stefan, 2012. "Equity home bias and corporate disclosure," Journal of International Money and Finance, Elsevier, vol. 31(5), pages 1008-1032.
    9. Habib, Maurizio Michael & Floreani, Vincent Arthur, 2015. "Financial exposure to the euro area before and after the crisis: home bias and institutions at home," Working Paper Series 1799, European Central Bank.
    10. Martijn A. Boermans & Robert Vermeulen, 2020. "International investment positions revisited: Investor heterogeneity and individual security characteristics," Review of International Economics, Wiley Blackwell, vol. 28(2), pages 466-496, May.
    11. repec:ecb:ecbwps:20141799 is not listed on IDEAS
    12. Nicolas Coeurdacier & Hélène Rey, 2010. "Home bias in open economy financial macroeconomics," SciencePo Working papers Main hal-01069440, HAL.
    13. Nicolas Coeurdacier & Hélène Rey, 2010. "Home bias in open economy financial macroeconomics," SciencePo Working papers hal-01069440, HAL.
    14. Jordi Mondria & Thomas Wu, 2013. "Imperfect financial integration and asymmetric information: competing explanations of the home bias puzzle?," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 46(1), pages 310-337, February.
    15. repec:zbw:bofrdp:2019_003 is not listed on IDEAS
    16. Hill, Brian & Michalski, Tomasz, 2018. "Risk versus ambiguity and international security design," Journal of International Economics, Elsevier, vol. 113(C), pages 74-105.
    17. Mishra, Anil V., 2015. "Measures of equity home bias puzzle," Journal of Empirical Finance, Elsevier, vol. 34(C), pages 293-312.
    18. Christina Guenther & Sofia Johan & Denis Schweizer, 2018. "Is the crowd sensitive to distance?—how investment decisions differ by investor type," Small Business Economics, Springer, vol. 50(2), pages 289-305, February.
    19. Benhima, Kenza & Bolliger, Elio, 2022. "Do Local Forecasters Have Better Information?," MPRA Paper 117072, University Library of Munich, Germany, revised Sep 2023.
    20. Anil Mishra, 2011. "Australia’s equity home bias and real exchange rate volatility," Review of Quantitative Finance and Accounting, Springer, vol. 37(2), pages 223-244, August.
    21. Mondria, Jordi & Wang, Xin & Wu, Thomas, 2021. "Familiarity and Surprises in International Financial Markets: Bad news travels like wildfire; good news travels slow," Journal of International Money and Finance, Elsevier, vol. 115(C).
    22. Lippi, Andrea, 2016. "(Country) Home bias in Italian occupational pension funds asset allocation choices," The Quarterly Review of Economics and Finance, Elsevier, vol. 59(C), pages 78-82.
    23. Wen-Lin Wu & Yin-Feng Gau, 2017. "Home bias in portfolio choices: social learning among partially informed agents," Review of Quantitative Finance and Accounting, Springer, vol. 48(2), pages 527-556, February.
    24. Broner, Fernando & Didier, Tatiana & Erce, Aitor & Schmukler, Sergio L., 2013. "Gross capital flows: Dynamics and crises," Journal of Monetary Economics, Elsevier, vol. 60(1), pages 113-133.
    25. Filippo De Marco & Marco Macchiavelli & Rosen Valchev, 2018. "Beyond Home Bias: Portfolio Holdings and Information Heterogeneity," Boston College Working Papers in Economics 942, Boston College Department of Economics.
    26. Hellmanzik, Christiane & Schmitz, Martin, 2017. "Taking gravity online: The role of virtual proximity in international finance," Journal of International Money and Finance, Elsevier, vol. 77(C), pages 164-179.

    More about this item

    Keywords

    home bias; information; portfolio flows; risk aversion; safe haven;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ecb:ecbwps:20131609. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Official Publications (email available below). General contact details of provider: https://edirc.repec.org/data/emieude.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.