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International Capital Mobility and Financial Fragility - Part 5. Do Investors Disproportionately Shed Assets of Distant Countries Under Increased Uncertainty?: Evidence from the Global Financial Crisis

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    The global crisis of 2008-09 went in hand with sharp fluctuations in capital flows. To some extent, these fluctuations may have been attributable to uncertainty-averse investors indiscriminately selling assets about which they had poor information, including those in geographically distant locations. Using a gravity equation setup, this paper shows that the impact of distance increases with investors’ uncertainty aversion. Consistent with a sudden increase in uncertainty, the negative impact of distance on foreign holdings increased during the global financial crisis of 2008-09. Host-country structural policies enhancing the quality of information available to foreign investors, such as strict disclosure requirements and prudential bank regulation, tended to mitigate withdrawals. Flux de capitaux internationaux et fragilité financière : Partie 5. Les investisseurs se séparent-ils surtout des actifs des pays géographiquement distants en période d'incertitude ? Évidence empirique pendant la crise financière globale 2 ABSTRACT/RÉSUMÉ International capital mobility and financial fragility: Part 5. Do investors disproportionately shed assets of distant countries under increased uncertainty? Evidence from the global financial crisis The global crisis of 2008-09 went in hand with sharp fluctuations in capital flows. To some extent, these fluctuations may have been attributable to uncertainty-averse investors indiscriminately selling assets about which they had poor information, including those in geographically distant locations. Using a gravity equation setup, this paper shows that the impact of distance increases with investors’ uncertainty aversion. Consistent with a sudden increase in uncertainty, the negative impact of distance on foreign holdings increased during the global financial crisis of 2008-09. Host-country structural policies enhancing the quality of information available to foreign investors, such as strict disclosure requirements and prudential bank regulation, tended to mitigate withdrawals. JEL classification codes: F21; G11; G18 Keywords: Capital flows; gravity model; uncertainty; crisis; financial regulation ************************************ Flux de capitaux internationaux et fragilité financière : Partie 5. Les investisseurs se séparent-ils surtout des actifs des pays géographiquement distants en période d’incertitude ? Évidence empirique pendant la crise financière globale La crise globale de 2008-09 a été accompagnée par de brusques fluctuations des flux de capitaux. Ces fluctuations pourraient être liées à la vente indiscriminée par des investisseurs averses à l’incertitude des actifs sur lesquels ils possédaient peu d’information, dont les actifs situés dans les pays géographiquement éloignés. Ce papier démontre dans le cadre d’une équation de gravité que l’impact de la distance sur la détention d’actifs internationaux augmente avec l’aversion à l’incertitude des investisseurs. Cet impact négatif de la distance sur la détention d’actifs a augmenté pendant la crise financière globale de 2008-09, ce qui est cohérent avec une soudaine augmentation de l’incertitude. Les politiques structurelles dans le pays de destination qui permettent aux investisseurs d’avoir accès à une information de meilleure qualité, comme par exemple de strictes obligations de divulgations des résultats et la régulation prudentielle des banques, ont eu tendance à réduire les retraits de capitaux des investisseurs étrangers.

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    File URL: http://dx.doi.org/10.1787/5k97fmsjxkd5-en
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    Paper provided by OECD Publishing in its series OECD Economics Department Working Papers with number 968.

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    Date of creation: 12 Jun 2012
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    Handle: RePEc:oec:ecoaaa:968-en

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    1. Rudiger Ahrend & Antoine Goujard, 2012. "International Capital Mobility and Financial Fragility - Part 6. Are all Forms of Financial Integration Equally Risky in Times of Financial Turmoil?: Asset Price Contagion During the Global Financial ," OECD Economics Department Working Papers 969, OECD Publishing.

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