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Working papers from the Economics Department of the OECD that cover the full range of the Department’s work including the economic situation, policy analysis and projections; fiscal policy, public expenditure and taxation; and structural issues including ageing, growth and productivity, migration, environment, human capital, housing, trade and investment, labour markets, regulatory reform, competition, health, and other issues.
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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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- 12 June 2012
- Bibliographic information
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:
- F21: International Economics / International Factor Movements and International Business / International Investment; Long-Term Capital Movements
- G11: Financial Economics / General Financial Markets / Portfolio Choice; Investment Decisions
- G18: Financial Economics / General Financial Markets / Government Policy and Regulation