International Capital Mobility and Financial Fragility - Part 5. Do Investors Disproportionately Shed Assets of Distant Countries Under Increased Uncertainty?

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 assetsabout which they had poor information, including those in geographically distant locations. Using a gravityequation 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 holdingsincreased during the global financial crisis of 2008-09. Host-country structural policies enhancing thequality of information available to foreign investors, such as strict disclosure requirements and prudentialbank regulation, tended to mitigate withdrawals.

Evidence from the Global Financial Crisis

International Capital Mobility and Financial Fragility - Part 5. Do Investors Disproportionately Shed Assets of Distant Countries Under Increased Uncertainty? (g27a215f)