Risk-On/Risk-Off, Capital Flows, Leverage, and Safe Assets
18 Pages Posted: 29 Jan 2013
Date Written: January 29, 2013
This paper describes the international flow of funds associated with calm and volatile global equity markets. During calm periods, portfolio investment by real money and leveraged investors in advanced countries flows into emerging markets, leading to an asymmetric asset swap (risky emerging market assets against safe reserve currency assets) and leveraging up by emerging market central banks. In declining and volatile global equity markets, these flows reverse, and, contrary to some claims, emerging market central banks draw down reserves substantially. In effect emerging market central banks then release safe assets from their reserves, supplying safe havens to global investors.
Keywords: capital flows, safe assets, international flow funds, vix, global liquidity
JEL Classification: E58, F3, G15
Suggested Citation: Suggested Citation