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

  • Rudiger Ahrend
  • Cyrille Schwellnus

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.

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File URL: http://dx.doi.org/10.1787/eco_studies-2012-5k4dpmw9hphc
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Article provided by OECD Publishing in its journal OECD Journal: Economic Studies.

Volume (Year): 2012 (2012)
Issue (Month): 1 ()
Pages: 1-20

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Handle: RePEc:oec:ecokac:5k4dpmw9hphc
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