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Do investors disproportionately shed assets of distant countries during global financial crises?: The role of increased uncertainty

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  • Rudiger Ahrend
  • Cyrille Schwellnus

Abstract

The global crisis of 2008-09 went hand 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 article 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.

Suggested Citation

  • Rudiger Ahrend & Cyrille Schwellnus, 2013. "Do investors disproportionately shed assets of distant countries during global financial crises?: The role of increased uncertainty," OECD Journal: Economic Studies, OECD Publishing, vol. 2012(1), pages 1-20.
  • Handle: RePEc:oec:ecokac:5k4dpmw9hphc
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    File URL: http://dx.doi.org/10.1787/eco_studies-2012-5k4dpmw9hphc
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    Cited by:

    1. Van Rijckeghem, Caroline & Weder di Mauro, Beatrice, 2014. "Deglobalization of Banking: The World is Getting Smaller," CEPR Discussion Papers 10139, C.E.P.R. Discussion Papers.
    2. Mark J. Holmes & Jesús Otero, 2015. "A Pairwise-Based Approach to Examine the Feldstein-Horioka Condition of International Capital Mobility," Working Papers in Economics 15/01, University of Waikato.
    3. Mark J. Holmes & Jesús Otero, 2016. "A pairwise-based approach to examining the Feldstein–Horioka condition of international capital mobility," Empirical Economics, Springer, vol. 50(2), pages 279-297, March.
    4. Ian Koetsier & Jacob Bikker, 2017. "Herding behaviour of Dutch pension funds in sovereign bond investments," DNB Working Papers 569, Netherlands Central Bank, Research Department.
    5. Caroline Van Rijckeghem & Beatrice Weder di Mauro, 2013. "Financial Deglobalization: Is The World Getting Smaller?," Working Papers 2013/14, Bogazici University, Department of Economics.
    6. MacDonald, Margaux, 2017. "International capital market frictions and spillovers from quantitative easing," Journal of International Money and Finance, Elsevier, vol. 70(C), pages 135-156.

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