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Uncertainty and International Capital Flows

Author

Listed:
  • Michael Siemer

    (Board of Governors of the Federal Reserve System)

  • Adrien Verdelhan

    (MIT Sloan)

  • Francois Gourio

    (FRB Chicago)

Abstract

In a large panel of 26 emerging countries over the last 40 years, aggregate stock market return volatilities, our measure of uncertainty, forecast capital flows. When the stock market return volatility increases, capital inflows decrease and capital outflows increase. We propose a simple decomposition of each country's market return volatility into two components: countries differ by their exposure to systematic volatility, measured by their uncertainty betas, and by their country-specific volatility. Capital inflows respond to both systematic and country-specific shocks to volatility, and they respond more in high uncertainty beta countries. These results are all statistically significant. A simple portfolio choice model illustrates the impact of uncertainty on gross capital flows: in the model, foreigners are exposed to expropriation risk. When the probability of expropriation increases, foreigners sell the domestic assets to the domestic investors, leading to a counter-cyclical home bias.

Suggested Citation

  • Michael Siemer & Adrien Verdelhan & Francois Gourio, 2015. "Uncertainty and International Capital Flows," 2015 Meeting Papers 880, Society for Economic Dynamics.
  • Handle: RePEc:red:sed015:880
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    File URL: https://economicdynamics.org/meetpapers/2015/paper_880.pdf
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Christian Friedrich & Pierre Guérin, 2016. "The Dynamics of Capital Flow Episodes," Staff Working Papers 16-9, Bank of Canada.
    2. Joel M. David & Espen Henriksen & Ina Simonovska, 2014. "The Risky Capital of Emerging Markets," NBER Working Papers 20769, National Bureau of Economic Research, Inc.
    3. Kollmann, Robert, 2016. "International business cycles and risk sharing with uncertainty shocks and recursive preferences," Journal of Economic Dynamics and Control, Elsevier, vol. 72(C), pages 115-124.
    4. repec:lrk:eeaart:36_1_16 is not listed on IDEAS
    5. Robert Kollmann, 2016. "Risk Sharing, the Exchange Rate and Net Foreign Assets in a World Economy with Uncertainty Shocks," 2016 Meeting Papers 721, Society for Economic Dynamics.
    6. Robert Ready & Mariano Croce & Federico Gavazzoni & Riccardo Colacito, 2016. "Currency Risk Factors in a Recursive Multi-Country Economy," 2016 Meeting Papers 297, Society for Economic Dynamics.
    7. Yang Liu & Mariano Croce & Ivan Shaliastovich & Ric Colacito, 2016. "Volatility Risk Pass-Through," 2016 Meeting Papers 135, Society for Economic Dynamics.

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